As more than 100 vessels wait to pass through the Panama Canal, congestion on the route is driving up freight prices and other costs for shipping companies, exacerbated by a shift in oil and gas flows, research finds. 

Historically low rainfall levels have forced authorities to reduce the number of vessels that can travel through the Panama Canal each day, from 40 to 32, and also lower the draft larger vessels. The result is a build-up of container ships and tankers on both sides of the passage. 

The Panama government insisted last week the route remains “open for business” – a strongly worded retort to a social media post from Colombian President Gustavo Petro claiming the canal had been closed – but Panama Canal Authority data shows 113 vessels remain in the queue as of press time. 

The authority says its goal is to keep the number of vessels waiting below 90, adding that 63 of the vessels waiting have not booked slots to pass through the canal. The average waiting time for ships travelling northbound was more than nine days in August, compared to fewer than three in June. 

Oystein Kalleklev, chief executive of LPG tanker operator Avance Gas, warned investors last week that the route remains “clogged”, resulting in a steep hike in prices for those looking to keep goods moving. 

“When Panama has less transit, they are not making as much money,” he said on Avance’s Q2 earnings call. “So what happens then is that they start auctioning slots, which makes it also very unpredictable when you get a slot, and people are paying top dollars.” 

Kalleklev said historically, the average fee for skipping the queue was US$844,000 for travelling northbound, and US$400,000mn for southbound. 

“It’s gone rapidly up,” he said. “We have seen first, [fees] starting to get US$1mn, US$1.5mn, close to US$2mn. And now last week, we saw US$2.4mn being paid for our spot auction fee. And when you add the regular fee, you’re getting close to US$3mn to get your ship through the canal.” 

At that point, Kalleklev said, it would have been cheaper to avoid the route entirely, travelling instead through the Suez Canal or around the Cape of Good Hope. 

Though rainfall is expected to increase in the first half of September, experts warn that further dry spells are expected for the rest of the year. 

“This means that Panama Canal water levels are likely to remain exceptionally low for months ahead yet, despite short-term improvements in the forecast,” says Isaac Hankes, senior weather analyst at London Stock Exchange Group. 

Avance’s Kalleklev added that typically, congestion in the Panama Canal does not peak until the fourth quarter of the year. 

Research by energy flow analytics firm Vortexa finds that congestion in the canal – along with shifts in global flows of crude and petroleum products – is likely to impact vessel availability and freight costs for US Gulf-origin tankers. 

Mid-range tankers leaving the US Gulf Coast have increased their use of the Panama Canal, with more shipments travelling to the west coast of South America rather than Brazil, which has increased imports of diesel from Russia, it finds. 

Freight rates in the Atlantic basin for mid-range tankers have risen by more than 40% on average since mid-July, writes freight analyst Dylan Simpson. 

“With restrictions on booking slots set to remain until at least early September at the time of writing, we could see this pattern persist in the short term,” Simpson says. 

The drought adds to warnings that unusual weather events exacerbated by climate change are likely to prove increasingly disruptive to global trade flows. 

A November 2022 report by global broker Marsh and climate risk analysis firm Cross Dependency Initiative found several of the world’s shipping lanes, including the Suez and Panama Canals, are exposed to changes in sea temperatures, which can affect water salinity and density. 

Panama’s government says 5% of global trade passes through the canal, with foreign affairs minister Janaina Tewaney describing it as “a commercial lifeline to the world”.