A warming Pacific has cut Panama Canal capacity, and canal access now sets the cost of moving LPG from the US Gulf to Asia.

El Niño tightens an already constrained canal

El Niño is a natural climate cycle that typically occurs every two to seven years. Warmer Pacific waters shift rainfall patterns, leaving Central America drier. NOAA declared El Niño conditions on 11 June 2026 and expects a strong event, peaking between October and December.

For shipping, the key issue is water. The Panama Canal relies on freshwater from Gatún and Alhajuela lakes to operate its locks. Rainfall in the canal watershed between May and August was 34% below average, prompting a reduction in maximum Neopanamax draft in July. Daily transits will also fall from 36 to 34 on 3 September and to 32 on 15 September.

Canal access is driving VLGC freight

VLGCs moving LPG from the US Gulf to Asia rely on the larger Neopanamax locks and have no comparable short alternative. Scarce capacity has pushed slot prices sharply higher, with SK Gas paying a record $5.3 million on 26 August for a northbound transit, compared with an average auction price of around $55,000 before February.

Owners are responding with discounted Cape routings, smaller vessels using the older locks and, in one case, a voyage around South America at a cost of roughly one month. These alternatives remove tonnage from the effective fleet and support earnings. Houston to Chiba earnings remain near $155,000 per day, while the twelve-month charter rate for a modern 84,000 cbm vessel has risen 15% since July to $69,865 per day.

For investors, the key question is duration. A reopening of the Strait of Hormuz could reduce competing demand for Panama Canal slots, but would not restore the water needed to increase transits. With El Niño expected to strengthen through year-end, canal capacity is likely to remain an important driver of VLGC freight in the months ahead.

Sources: Bloomberg, Clarksons Research, gCaptain, NOAA & Panama Canal Authority