Panama Canal Faces Growing Drought and Transit Curtailments

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Written by Aaron Studwell, Ph.D., Energy Meteorologist & Analyst (Sugar Land, Texas)

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Summary

The Panama Canal entered 2026 in a much stronger position than experienced during the 2023--2024 drought. Improved reservoir conditions and water-conservation measures allowed traffic to recover as shipping demand strengthened.

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Panama Canal

During the first half of fiscal year 2026, the Panama Canal Authority (ACP) reported 6,288 transits, up 224 year-on-year, while cargo tonnage rose about 5%. Revenues during the first five months were roughly 8%-10% above the same period in 2025.

That recovery is now being tested. Rainfall across the canal watershed from May through August 2026 was about 34% below the long-term average. As a result, the ACP reduced daily transit capacity from 36 vessels to 34 earlier this month. Another cut is scheduled for September 15, which will further reduce the daily limit to 32.

According to Industrial Info Resources analysis, the near-term concern is no longer simply whether drought develops, but how far reservoir conditions deteriorate going into the upcoming dry season--December 2026 through April 2027--and how aggressively the ACP must respond.

Energy Trade Faces Another Routing Risk

The timing matters for energy markets because Panama traffic had been recovering while other global chokepoints became less reliable.

U.S. Energy Information Administration data show that during second-quarter 2026, about 3.2 million barrels per day (bpd) of crude oil, condensate, and petroleum products moved through the canal. Petroleum products accounted for 94% (~3 million bpd) of this traffic. Liquefied natural gas (LNG) flows averaged about 600 million cubic feet per day.

Further transit reductions would increase competition for reservations and raise the risk of queues, higher auction premiums, and increasing schedule uncertainty. LNG and refined-product shippers are especially sensitive because alternative routes can materially extend voyages. Cargoes moving between the U.S. Gulf Coast and Asian markets may instead sail around the Cape of Good Hope, increasing fuel use, vessel-day requirements, and subsequently, delivered costs while also reducing fleet availability. Recent shipping disruptions elsewhere have made that routing flexibility increasingly valuable.

The ACP says rainfall between September and November will be decisive. ACP administration has warned that capacity could be reduced further as the end of the fiscal year 2026 approaches, if reservoirs do not recover adequately. The canal therefore needs to rebuild water reserves during the heart of the wet season before seasonal drying begins.

El Niño Has Done This Before

The canal's vulnerability to El Niño is well documented. In 2015, the ACP announced draft restrictions after drought pushed Gatún and Alhajuela lakes substantially below seasonal averages. Additional restrictions followed in 2016 before rainfall improved.

The ACP also cites 1982--1983, 1997--1998, 2015--2016, and 2023--2024 as episodes in which the strongest effects of moderate or strong El Niño events became more apparent in the following year.

The 2023--2024 episode remains the clearest and most recent reference point. Extremely low Gatún Lake levels forced daily transits down to as few as 22 vessels, while draft restrictions limited cargo capacity.

A 2025 study published in Geophysical Research Letters found that 79% of the 14 lowest-water events analyzed since 1965 were associated with El Niño conditions in the preceding year. The lowest levels occurred when precipitation deficits and enhanced evaporation persisted across multiple wet seasons.

Why the Pattern Favors Drought

A positive phase of the El Niño shifts tropical Pacific convection away from Central America. In Panama, this pattern weakens the Caribbean low-level jet, reducing the movement of tropical moisture that normally supports the May--November wet season.

Seasonal observations show that the 2026 El Niño is strengthening and has a greater than 90% chance of becoming very strong during the Northern Hemisphere fall and winter. The seasonal outlook from NOAA's Climate Prediction Center shows a 75% likelihood that the October--December event could exceed the strength of previous El Niño events in the modern record.

The concern is not only reduced rainfall. Warmer conditions can increase reservoir evaporation; the 2025 study projects reduced wet-season rainfall as the principal mechanism behind future lake-level declines, with evaporation acting as a secondary stressor.

Seasonal Outlook

The disruption comes as EDF is already managing heat-related constraints elsewhere in its 57-reactor fleet. Extreme temperatures have warmed rivers used for reactor cooling. The Panama Canal is not yet repeating the depths of the 2023--2024 crisis, but the direction has changed quickly. Transit limits are tightening, rainfall is well below normal, and one of the strongest El Niño events on record is still intensifying.

For energy shippers, the risk is cumulative: a deficient 2026 wet season could leave the canal entering the 2027 dry season without enough water to sustain current traffic. That would raise the probability of additional transit cuts, higher shipping costs, and renewed pressure on LNG and refined-product routes.

The planned Río Indio reservoir offers a longer-term buffer, but completion remains years away. Until then, Panama Canal traffic will remain unusually exposed to El Niño and the rainfall performance of each wet season.

Key Takeaways

• Panama Canal watershed rainfall from May through August was about 34% below normal, reversing much of the reservoir improvement entering 2026.
• Daily transit capacity has been reduced from 36 to 34 vessels and is scheduled to fall to 32 on September 15, with additional cuts possible if rainfall remains deficient.
• About 3.2 million barrels per day of crude oil, condensate and petroleum products moved through the canal during second-quarter 2026, making further restrictions consequential for energy trade.
• A strengthening El Niño favors reduced Central American rainfall, while historical analysis found 79% of the 14 lowest Gatún Lake events since 1965 followed El Niño conditions.
• The key risk is entering the December 2026--April 2027 dry season with inadequate reservoir reserves, potentially increasing transit restrictions, shipping costs and pressure on LNG and refined-product routes.

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