El Niño Is Already Squeezing the Panama Canal

A potentially historic El Niño is strengthening across the Pacific just as the Panama Canal begins tightening one of the world’s most valuable commercial shortcuts. The Canal Authority reported in August that cumulative rainfall since May was 34 percent below average and reservoir inflows were 44 percent below normal; NOAA, meanwhile, expects El Niño to continue strengthening through the end of the year and gives it a 69 percent chance of exceeding every previous event in its post-1950 record during October through December. Panama isn’t facing a canal crisis yet, but it is already operating with less margin for error.

Under Canal Authority Advisory A-29-2026, booking dates beginning September 4 are limited to nine daily Neopanamax slots and 25 Panamax slots, or 34 transits in total. Panamax availability falls again on September 15, bringing the combined daily total to 32; the maximum authorized draft for the largest ships falls to 48 feet on September 2 and, under the current schedule, to 47.5 feet on October 1.

Those reductions are significant without being catastrophic. The canal averaged about 34 oceangoing transits a day in July, so the September measures are better understood as a tightening of available capacity than as anything resembling a shutdown. The more consequential question is what happens after September, because Gatún and Alhajuela Lakes still have to rebuild enough water during the remaining rainy months to carry the canal through the January-to-April 2027 dry season.

That uncertainty goes directly to the canal’s operating model. Ships entering the locks are raised roughly 85 feet to Gatún Lake and then lowered toward the opposite ocean, consuming freshwater from the surrounding watershed in the process; when less water is available, the Canal Authority can principally conserve it by reducing the number of daily transits or by limiting vessel draft. The first creates outright scarcity, forcing ships to wait, reroute, or compete for auctioned passage, while the second allows ships to continue crossing but potentially with less cargo aboard, spreading essentially the same voyage cost across fewer containers, fewer barrels, or fewer tons.

The market has already demonstrated what the first kind of scarcity can be worth. South Korea’s SK Gas recently paid a record $5.3 million to secure a September 1 northbound transit for the LPG carrier G. Spirit, surpassing a previous record of $4.6 million set only weeks earlier; canal auction prices averaged roughly $1.1 million in August, more than 16 times the comparable average a year before.

El Niño didn’t create those prices. Demand for urgent Panama passage had already surged after the Iran conflict disrupted Middle Eastern shipping and increased the value of moving U.S. Gulf energy cargoes toward Asia without spending several additional weeks at sea. Seven-figure bids were appearing while the canal still had greater operating flexibility; what has changed is that a geopolitical premium on the shortcut is now colliding with a developing water constraint on how much of that shortcut Panama can offer.

For an LNG tanker traveling from the U.S. Gulf Coast to Northeast Asia, avoiding Panama can add roughly 20 days to the voyage, turning a trip of about 30 days through the canal into something closer to 50 around the Cape of Good Hope. The additional fuel and charter expense matters, but so does the time the vessel remains occupied; when enough ships spend extra weeks at sea, effective fleet capacity tightens even though the number of ships in the world hasn’t changed.

That dynamic was already visible in July, when 11 laden LNG tankers used the canal, up from six in June and the highest monthly total since November 2023; nine were headed for Japan or South Korea. Higher Asian energy prices had improved the economics of the shorter Panama route at roughly the same moment the canal’s water position began to deteriorate, placing rising commercial demand against declining hydrological flexibility.

Panama also isn’t tightening in isolation. The Strait of Hormuz remains disrupted by the Iran conflict, while security concerns around the Red Sea and Bab el-Mandeb continue to influence routing decisions elsewhere in the system. Those chokepoints aren’t interchangeable in every trade, but they all draw on a finite global pool of ships, crews, charter time, and port capacity; a tanker or container vessel that spends another two or three weeks on a longer route isn’t available to move another cargo during that period.

Container markets are beginning to reflect some of that strain. On August 21, S&P Global assessed the spot cost of moving a forty-foot container from North Asia to the North American East Coast at $11,000, compared with $7,700 to the West Coast, leaving a $3,300 gap that had widened substantially since mid-July. Panama isn’t responsible for all of that spread, since Asian weather disruptions and limited vessel availability are contributing as well, but tighter drafts and fewer transit opportunities make East Coast routing relatively more expensive and increase the attractiveness of moving cargo through Pacific ports instead.

For American importers, the practical result is less a single Panama-related surcharge than a choice among different forms of higher cost. Cargo can continue to Savannah, New York, or another East Coast port at a higher freight rate; move through Los Angeles or Long Beach and incur additional rail or trucking expense; accept longer delivery times; or be supported with larger inventories against the risk of future disruption. Nearly 70 percent of Panama Canal cargo in fiscal 2025 either originated in or was destined for the United States, particularly through Gulf and East Coast ports, which makes even a moderate deterioration in canal economics unusually relevant to American supply chains.

The inflation implications should not be overstated. An IMF study covering 143 countries found that a doubling of global freight rates was associated with roughly 0.7 percentage point of additional inflation, but Panama’s current restrictions are far narrower than the global freight shock examined in that research; the relevant concern is persistence, not the September slot count by itself. Several quarters of higher freight costs, longer voyages, tighter vessel availability, and larger inventory requirements can eventually migrate through manufacturers, distributors, and retailers even when no single disruption is large enough to dominate the economy.

Whether that becomes necessary depends in part on what the Canal Authority can deliver institutionally. ACP has already been using operational water-saving measures, including tighter lock management, restrictions on special lockages, leakage controls, and reduced hydroelectric generation, and Panama entered 2026 with stronger reserves than during the worst of the 2023 drought. Over the longer term, the Río Indio reservoir project is intended to provide a much larger buffer for both canal operations and national water supply, but construction is expected to begin only in 2027; it will not add meaningful new storage capacity in time for the coming dry season.

That leaves the next several months unusually important. If late-season rainfall improves enough to rebuild Gatún and Alhajuela, the current reductions may prove to be an expensive but temporary adjustment, and ACP could enter 2027 with enough water to avoid much deeper restrictions. If reservoir levels remain weak into the end of the rainy season, however, the October draft schedule, auction clearing prices, LNG transit counts, and the widening freight gap between East and West Coast routes will become increasingly useful signals of how much pressure is building.

For Gulf energy exporters, East Coast ports, importers, and inventory planners, that distinction matters more than whether the canal moves 32 or 34 ships on any particular day. A meaningful reservoir recovery would argue for treating the present freight premium as temporary; a weak close to the rainy season would make it prudent to plan for tighter canal capacity, longer voyages, and higher inventory buffers before the 2027 dry season reaches its worst point.

The Panama Canal’s value has always been simple: it eliminates enormous amounts of distance. Panama can manage moderate water shortages, shipping companies can reroute vessels, and global trade will keep moving; what becomes difficult is doing all of those things cheaply when several major chokepoints are under pressure at once.

The world’s ships can always take the long way around. A record $5.3 million bid to avoid doing so is already a pretty good indication of what the long way is worth.