Key Takeaways
The month of May closed with the United States and Iran exchanging blows as negotiations over a possible extension of a ceasefire seemed stalled.
The United States struck Iran after it attacked a U.S. drone over international waters, with Iran responding by attempting to strike U.S. personnel based in Kuwait.
Iran is suggesting talks are suspended, but President Trump is urging patience for all parties.
Oil prices responded with a rise of more than $6 per barrel on the 1st of June.
Iran has been threatening to sever cables under the Strait of Hormuz carrying data over which about $10 trillion in financial transactions occur daily as a means of striking out.
China’s oil imports from the region are dropping dramatically, reaching their lowest level in 10 years, though its enormous strategic and commercial reserves help insulate it from the heavy impacts other nations in Asia are experiencing.
The United States struck Iranian military sites over the weekend and Iran’s Revolutionary Guards targeted a U.S. base in response. Israel also ordered troops to move further into Lebanon in its fight with the Tehran-backed Hezbollah militant group. Iran’s Tasnim news agency reported that Tehran’s negotiating team halted message exchanges with the United States and its allied “Resistance Front” is considering measures to completely block the Strait of Hormuz and choke other waterways, including the Bab el-Mandeb Strait off the coast of Yemen, a narrow passageway that controls sea traffic towards the Suez Canal. That prompted oil prices to rise more than $6 per barrel on June 1. The fighting dimmed hopes that the U.S. and Iran could soon announce an extension to their ceasefire. President Trump, however, posted on Truth Social that “Iran really wants to make a deal” and everyone should “sit back and relax.”
Over the weekend, the U.S. military targeted Iranian air defenses, a ground control station, and two drones that were threatening ships after “aggressive Iranian actions,” including shooting down a U.S. drone over international waters. On May 31, U.S. forces intercepted two Iranian ballistic missiles targeting American forces based in Kuwait; no American personnel were harmed. On June 1, Kuwait activated its air defenses and denounced Iranian missile and drone attacks since they were undermining efforts to reduce tensions in the region.
To help with the ship backlog, American ships are guiding commercial vessels through the Strait of Hormuz; most with their transponders turned off to avoid detection. U.S. Central Command has helped around 70 commercial ships pass through the strait in the last three weeks. According to shipping analysts, the U.S.-guided crossings appear to follow routes that are closer to Oman. Ships passing near Iran without obtaining Iranian approval face the threat of an attack by Iranian drones or missiles.
Data Cables May Be Targeted
Executives are worried about Iran’s threats to damage or seize control of data cables under the strait. In early May, an Iranian military spokesman said the country was threatening to demand license fees from Amazon, Google, Microsoft, and Meta to use the cable networks they operate under the strait. The cables could be cut or tampered with. A semiofficial news agency called the networks a “vulnerable point in the region’s digital economy.”
It is estimated that the cables carry financial transactions totaling about $10 trillion a day. The cables connect the Gulf region to parts of Europe, Asia, and Africa, part of a vast subsea infrastructure that carries about 99 percent of global internet traffic, according to the International Telecommunication Union, a U.N. agency. The group estimates there are about 200 cable cuts worldwide every year, mostly from earthquakes or dragging anchors. Iran still has the combat divers, unmanned underwater vessels, and munitions needed to shut down cable traffic, according to an April report by Al Habtoor Research Center.
A 2024 cable cut in the nearby Red Sea, during attacks on commercial vessels by Houthi rebels in Yemen, shut 25% of internet traffic across the region and took weeks to restore. Only four companies specialize in laying undersea cables, with about 20 repair ships available, many of which would need weeks to arrive in the Middle East.
China’s Import Situation
China’s crude oil imports dropped to the lowest level in 10 years in May, driven primarily by economic factors from the conflict in the Middle East. Seaborne imports of crude oil were 6.36 million barrels per day in May, down from 8.10 million barrels per day in April and 11.39 million barrels per day imported in February. China’s May imports were the weakest since October 2016. The conflict in the Middle East raised China’s oil prices, causing its demand to be cut back. A reduction of up to 2 million barrels per day in monthly imports in response to sharp price increases is not unusual for China, but from February to May, the drop was far larger at over 5 million barrels per day.
Like other regions, China is having trouble making up the import losses from the Middle East from other exporting countries. China’s imports from Iraq dropped from 790,000 barrels per day in February to 60,000 barrels per day in May, and those from Kuwait dropped from a recent high of 522,000 barrels per day in October to zero in May.
China’s refineries are likely using up their commercial inventories of both crude oil and refined products. China has also cut back on its exports of refined products, allowing more petroleum products to be kept for domestic use. Its refined product exports dropped from 777,000 barrels per day in February to 463,000 barrels per day in May—a drop of 40%. Once the commercial inventories are depleted, China will have to tap into its large strategic reserves unless it can somehow increase its oil imports and/or cut refinery processing rates substantially.
Analysis
U.S. Iran peace negotiations are at a standstill as some military activity has resumed. The United States struck Iranian military sites over the weekend as Iran threatened U.S. ships and struck down a U.S. drone in international waters, and its Revolutionary Guards targeted a U.S. base. Israel also ordered troops to move further into Lebanon in its fight with the Tehran-backed Hezbollah militant group. The military activity raised oil prices by over $6 a barrel on June 1. The United States has been guiding commercial ships through the Strait of Hormuz on the Oman side over the past three weeks, but Iran is threatening to shut the strait completely. Executives are now worried that Iran will either cut or damage the underwater data cables that carry a substantial portion of internet traffic.
