Choked Petroleum Flows and the Impact on Investors

Overview

Our installments aim to address those developments which have the greatest impact on sophisticated institutional investors and risk managers. In a development anticipated by few and generally underappreciated, the dominant source of the world’s energy and feedstock has been curtailed.

I. Boxed In

The Houthis’ control of southwestern Yemen and Iranian militias bombing the East-West Pipeline have effectively curtailed a large portion of energy exports from the Gulf. Small exceptions are the few ships traveling north via the Suez Canal, and those vessels bearing American flags traveling south. While the U.S. has placed considerable pressure on the IRGC controlling Iran, relatively few vessels are exiting. Also note that the Suez Canal could be targeted by Iran or its proxies via drones. This could occur either by attacking ships directly or by dropping mines. Recall the multi-day closure of the canal in March 2021 when the Ever Given became lodged. Thus, the only remaining egress of oil from the region is not guaranteed.

II. Paper Tiger

On paper, the Saudi Army has a large population, but fewer troops than the Houthis.^1,2,3

Exhibit II · Population and Armed Strength, Houthi Versus Saudi Arabia

Sources: U.S. State Department report, Saudi General Authority for Statistics, UN Panel of Experts on Yemen

However, the Saudi strength has withered and apparently a good portion of the army is staffed by foreigners and presumably is less dependable than would normally be the case.

III. Let’s Make a Deal

THE issue for most observers is what might be the terms for a re-opening of the shipping. As of September 20, 2026, Iran’s most recent publicly stated conditions for ending the current war with the United States and Israel are:

• End the war on every front, expressly including Israeli military operations in Lebanon.
• Release Iran’s frozen foreign assets, reportedly totaling billions of dollars.
• End the U.S. naval blockade of Iranian ports.
• Stop U.S. interference in Iran’s internal affairs.
• End U.S. cooperation with Iranian opposition groups, described by Tehran as “opponents of our revolution.”
• End all U.S. attacks on Iranian territory.

Mohsen Rezaei, secretary of Iran’s Supreme National Security Council, said these conditions had been delivered to Washington through Qatar. Iran is awaiting the U.S. response.⁴

IV. The Elephant(s) in the Room

There are a few considerations (mostly unspoken) involved in the process:

• Midterms - Although few in the Administration will admit it, the major concern in the Administration is the pending midterm elections. The concern is that polling for Republicans is weak, in part because of high gas prices and the unpopularity of the war. Hence, an agreement might be forthcoming. While some tout the benefit of the Venezuela energy deal, it is likely to take several quarters before the results will be felt.
• Saudi Budget - Saudi Arabia depends on the regular flow of petroleum to fund their economy. With export problems, a fair assumption is that the government will have to sell assets including US Treasuries and possibly borrow.
• Energy Prices - crude prices provide a ready signal for the market’s concerns. The latest is that Brent has reached the relatively high level of $104 per barrel. Western Europe is likely to be particularly hard hit with the curtailment of supplies from Russia and now from the Middle East. Below is a graph of diesel prices:

Source: U.S. Energy Information Administration, weekly on-highway No. 2 diesel retail price.

• Interest Rates - this crisis could not have come at a worse time for many sovereignties as they are pressed to meet increased funding costs, high social service costs, and a rise in interest rates.

If the petroleum flows are not restored shortly, the probability of a recession increases.The pending summit between Mr. Trump and Mr. Xi might be helpful as many would benefit from an easing of hostilities.

V. Conclusion

We have prided ourselves in providing advanced warning to sophisticated institutional investors and risk managers of pending developments. We hope we are wrong about conditions, but typically it is best to understand underlying conditions and adjust rather than ignore emerging threats.

Appendix A - Recent CLO Rating Actions

Egan-Jones against the other NRSRO on the same tranche, with collateral test cushions.

The ten most recent Egan-Jones CLO tranche ratings are shown below alongside the other NRSRO’s equivalent rating on the same tranche and the current collateral test cushions. Every rated tranche is listed in the complete Egan-Jones CLO ratings table at egan-jones.io/non-nrsro-ratings/clo.

Egan-Jones Ratings Company CLO rating reports; report data as of 09/17/26.

_{Diff is the gap in notches between the Egan-Jones rating and the other NRSRO’s equivalent rating on the same tranche, measured on a 22-step scale from AAA to D. Green is Egan-Jones higher; red is Egan-Jones lower; “=” is a match. Cushion is the current test level divided by its trigger, so a figure below 1.00 means the test is failing. Egan-Jones ratings shown here are not NRSRO ratings.}

Sources & Footnotes

1. U.S. Department of State, Country Report on Terrorism 2024, Yemen
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2. Saudi General Authority for Statistics, Population Estimates
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3. UN Panel of Experts on Yemen, final report to the Security Council (S/2024/731), which puts Houthi fighter strength at approximately 350,000 in mid-2024, up from 220,000 in 2022
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4. IranWire report, September 9, 2026
   

Additional Sources

• Exhibit 3 - U.S. Energy Information Administration, weekly on-highway No. 2 diesel retail price
• Appendix A CLO table - Egan-Jones Ratings Company CLO rating reports, published at egan-jones.io/non-nrsro-ratings/clo