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El Nino returns: What it means for global trade and the Panama Canal

El Nino, just two years after the most severe drought in the history of the Panama Canal forced ships to wait for weeks for passage, and triggered multimillion-dollar bidding wars for transit slots. Now El Nino threatens again the rainfall that feeds this waterway. El Nino is strengthening and reservoirs are shrinking. The industry is preparing for another disruption on one of the most important waterways in the world. Some?ships have already taken long detours through Africa. The Panama Canal Authority reversed its previous promise to limit 'passage' as it prepares for an El Nino that is longer than usual.

1. Where does the canal receive its water from?

The Panama Canal, unlike the Suez Canal (in Egypt), relies on the use of fresh water for the operation of three sets a locks. This artificial waterway stretches 80 km (50 miles) between the Pacific Ocean and the Atlantic Ocean.

Operation depends on two manmade reservoirs: Gatun and Alajuela Lakes. These lakes release millions of liters per transit, allowing ships to be raised and lowered through gravity-fed locks.

2. El Nino and the Panama Canal: Why is it important?

The weakened winds can cause the reservoirs to dry up as a result of the warm water in the Pacific Ocean.

Samuel Munoz is an associate professor at Northeastern University of Civil and Environmental Engineering. He said that, when reservoirs are low, the authority that controls the canal must reduce the number of ships that it allows to pass through in order to conserve water. This reduction "creates disruptions of the shipping system that ripple throughout the global economy."

3. Why are these water resources vulnerable? The Smithsonian Tropical Research Institute's monitoring system in Panama has been recording some of the highest air temperatures ever since May. May, June, and July all posted record or near-record average monthly temperatures.

Steven Paton, the monitor who runs the network, said that rainfall in Panama during this period was below average. He added that some stations report record lows or values near records, especially around the canal.

4. What is the Panama Canal Authority doing? Starting September 4, the Panama Canal Authority will cap daily?transit slots at 34 vessels and reduce that number to 32 by September 15. El Nino is expected to continue, and water levels are predicted to fall further. This could force the authority to tighten up again. The measures are similar to those taken in 2023-24, when drought reduced daily transits down to 22 ships according to official statistics. For the fiscal year 2026 (October to September), the canal recorded an average of 35 to 34 daily transits.

5. What impact does this have on shipping?

Panama Canal Authority acknowledged, without providing further details, that some ships that transited the canal recently "paid amounts exceeding one million dollar at auction to meet specific market needs."

6. What are the alternatives?

Rohit Rathod is a senior analyst for Vortexa and a senior oil industry analyst. He said that many shippers take the long route around Africa because they don't have long-term slots packages or large auction budgets.

He said that so far, in August, about half of the gas carriers headed to Asia chose the Cape of Good Hope instead of the Panama Canal. This is the highest percentage for the past decade.

A large gas tanker traveling from Houston to Japan would take about 26 days to pass through the Panama Canal, but it would take 45 days just to go around Cape of Good Hope. 7. What are the long-term options being considered?

Panama is considering a longer-term solution: a reservoir at Rio Indio. The Panama Canal Authority claims that this would provide water to more than half of the population and ensure the operation of the canal for the next fifty years. It would also improve conditions for nearby communities.

Environmental activists have been instrumental in blocking First Quantum Mining's contract. Some argue that the reservoir is unnecessary and suggest alternatives, such as Lake?Bayano.

8. What is the difference between this El Nino and previous ones? The Climate Prediction Center of the U.S. National Oceanic and Atmospheric Administration issued a forecast last week that El Nino was strengthening. It said there is a greater 90% chance of an "extremely strong" event in the Northern Hemisphere during the fall and winter of 2026-2027.

Clarksons Securities stated in a recent research note that "El Nino has now emerged as a major risk" to a sector already struggling with capacity constraints and geopolitical conflicts in the Middle East. (Reporting from Stefanie Eschenbacher, Mexico City; Elida Moreno, Panama City; editing by Emily Green and Sanjeev miglani).

(source: Reuters)