El Niño Returns: Why The Panama Canal Faces New Shipping Disruptions

A strengthening El Niño is putting fresh pressure on the Panama Canal's water supply, raising the prospect of tighter restrictions on shipping through the waterway just two years after the worst drought in the canal's history forced vessels to wait weeks for passage and triggered multi-million-dollar bidding for transit slots.

The Panama Canal Authority is preparing for a longer-than-usual El Niño season by limiting the number of vessels allowed through each day, while falling reservoir levels are prompting some shippers to consider longer routes around Africa. According to Reuters, the authority on Thursday reversed an earlier pledge not to limit passage as it prepares for the possibility of further declines in water availability.

The 80-km (50-mile) artificial waterway depends on freshwater to operate its locks, making rainfall in Panama critical to the movement of ships between the Pacific and Atlantic oceans. Another period of restrictions could increase shipping costs, extend journey times and put further pressure on global trade.

Why rainfall is critical to the canal

Unlike Egypt's Suez Canal, the Panama Canal relies on freshwater to operate its three sets of locks, which raise and lower vessels as they cross the waterway.

Operations depend on two man-made reservoirs, Gatún Lake and Alajuela Lake. They release millions of litres of water with each transit to raise and lower ships through the gravity-fed, century-old locks.

This dependence on freshwater leaves the canal vulnerable when rainfall falls for prolonged periods.

How El Niño affects Panama's water supply

El Niño involves unusually warm waters in the Pacific Ocean and can alter weather patterns far from the region where the warming occurs.

In Panama, it can weaken the winds that bring rain to the country, reducing the water flowing into the reservoirs that supply the canal.

Samuel Muñoz, an associate professor of civil and environmental engineering at Northeastern University, said that when reservoirs run low, the canal authority must reduce the number of ships it allows through to conserve water — a reduction that "creates shipping disruptions that ripple through the global economic system."

Reuters reported that the latest El Niño is developing as Panama experiences high temperatures and below-average rainfall.

Heat and low rainfall add to the pressure

Since May, the Smithsonian Tropical Research Institute's monitoring network in Panama has recorded some of the hottest air temperatures since monitoring began. May, June and July each recorded record or near-record monthly averages.

Rainfall over the same period was also below average across much of Panama.

"Rainfall during the same period in most of Panama was well below average," said Steven Paton, who runs the monitoring network. He added that some stations were recording record or near-record low rainfall, particularly around the canal.

What restrictions are being introduced

The Panama Canal Authority will cap daily transit slots at 34 vessels from September 4 and reduce the number to 32 from September 15.

However, projections indicate that water levels could fall further as El Niño continues, potentially prompting the authority to impose additional restrictions.

The measures echo those introduced during the 2023-24 drought, when the number of daily transits fell to as few as 22 ships, according to official figures.

The canal recorded an average of 34 to 35 daily transits during fiscal year 2026, which runs from October to September.

Why shipping costs could rise

Fewer available transit slots can force shippers to compete for passage or consider alternative routes.

During the previous drought, reports emerged that one tanker had paid more than $4 million for priority passage. The Panama Canal Authority, without providing further details, acknowledged that "some ships which transited recently have paid amounts exceeding one million dollars at auction to meet their specific market needs."

The return of El Niño therefore comes as the shipping sector is already dealing with other capacity constraints and geopolitical tensions in the Middle East.

Why ships are taking longer routes

The Panama Canal is not the only option for vessels travelling between the Atlantic and Pacific oceans, but alternatives can significantly extend journey times.

Rohit Rathod, a senior oil market analyst at Vortexa, said that shippers without long-term slot packages or deep auction budgets are instead taking the longer route around Africa.

So far this August, roughly half of gas carriers heading to Asia have chosen the Cape of Good Hope rather than the Panama Canal, Rathod said. He added that this was the highest share in a decade.

The difference in transit time is significant. A large gas tanker travelling from Houston to Japan takes about 26 days through the Panama Canal, compared with 45 days around the Cape of Good Hope.

Panama's longer-term water plan

Panama is also considering a longer-term solution to the canal's water needs.

The country is weighing a new reservoir at Río Indio. The Panama Canal Authority says the project would secure water for more than half the population as well as the canal's operations for the next 50 years, while improving conditions in nearby communities.

The proposal faces opposition from environmental activists, some of whom argue that the reservoir is not necessary and have pointed to alternatives such as Lake Bayano.

Resistance to the reservoir proposal comes from environmental activists, who were instrumental in blocking First Quantum's mining contract in Panama.

How this El Niño compares with earlier events

In its forecast issued last week, the Climate Prediction Center of the US National Oceanic and Atmospheric Administration said El Niño was strengthening.

It gave a greater than 90% chance of a "very strong" event during the Northern Hemisphere autumn and winter of 2026-27.

Clarksons Securities said in a research note this week that "El Niño is now emerging as a key risk" for a shipping sector already facing capacity constraints and geopolitical tensions in the Middle East.

According to Reuters, the latest threat comes about two years after the Panama Canal's worst drought disrupted vessel traffic, forced ships to wait for passage and contributed to multi-million-dollar bidding for transit slots.

If water levels continue to fall as El Niño persists, the canal authority could impose further restrictions on a shipping sector already facing capacity constraints and geopolitical tensions in the Middle East.