Oil prices are up for one reason: Iran. While some here are rattling sabers, even predicting war, complete with attempts to close the Strait of Hormuz or attack New York City, I'm here to counsel caution. The reason, Iran.
We associate the possibility of a war over oil (NYSEARCA:OIL) with the policies of Prime Minister Mahmoud Ahmadinejad. We assume he is allied with clerics led by Ayatollah Ali Khamenei who hold ultimate power there. This last part is not true. The March 2 elections actually represent a showdown between Khamenei and Ahmadinejad, and Khamenei is playing hardball. The targets of the recent increased censorship are Ahmadinejad, and his allies, as more liberal elements are not contesting the election.
Iranians who are desperate to get messages out can do so, using Tor, an obfuscated proxy system that makes encrypted traffic the country is censoring look like an ordinary chat. Internal communications, those that might take place among Ahmadinejad supporters or aim toward building support for him, are less likely to go through.
Khamanei's public rhetoric matches that of Ahmadinejad, but the issue within the country is the economy, with the government now resorting to barter in its effort to evade sanctions. As StrategyPage notes, it's this battle between the clerics and Ahmadinejad, who portrays himself as an anti-clerical reformer, that is the real death match within the country.
Neither side can afford to seem weak on the West, but whoever wins the struggle will face a dire economic situation, and the only way to relieve it is to find markets for Iranian oil and thus to reduce the global temperature.
You might compare it to a primary election in which candidates on one side are contesting for the same base and working to outdo themselves in fealty to a narrow agenda. Once that question is settled, the winning side will have to address the shared problems of the population. Even if the rhetoric doesn't show dramatic change, actions may well speak louder.
I expect Khamanei to win these elections, regardless of public opinion, since his side holds the ultimate levers of power, and any other leader serves at their sufferance. Any lessening of tensions will reduce the risk premium on imported oil, and probably send the market price down at least $10/barrel, perhaps more, in a very short time. I expect that move to start on or about March 3. Failure by the clerics to act on the economy could result in a real war, a civil war, with both liberals and Ahmadinejad united against clerical rule. That, too, would reduce the risk premium by focusing Iranian attention inward.
The only way to maintain current prices, and tension, is for an anti-clerical leader, Ahmadinejad, to defeat the clerics in the coming election. But for that to happen he would need popular approval of policies that are sinking Iran's economy. And in all elections, as in ours, the rule remains the same. It's the economy, stupid.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.