The Panama Canal is of immense strategic importance to crude oil shippers significantly reducing the voyage time for oil tankers traveling between the Atlantic and Pacific Oceans
“We started seeing the impacts of the drought with liquefied petroleum gas [shipments],” said Matt Smith of logistics monitoring firm Kpler. “Now its broadening out to clean products. It’s working its way up the chain.”
Drought conditions have limited water levels at Lake Gatun, which is key to the functioning of the canal locks, and the Canal Authority has limited drafts and restricted the number of vessels traversing the crucial chokepoint. The authority has said it will maintain those restrictions well into this year, subject to adjustments.
Tankers looking to traverse the canal faced a minimum 15-day wait in late December unless they paid premiums to cut in line, one shipbroker said, and alternative routes — which include going around the southern tip of South America or Africa, depending on the market — are much less efficient, add cost and could strain tonnage capacity.
Kpler data show that shipments of clean products from the US Gulf Coast (Padd 3) to Chile, Peru, and Ecuador averaged 254,000 barrels per day in December, the least since May 2023. On an annual basis, the flow was some 16.9% lower in 2023 than in the year prior.
The longer drought conditions persist, the more likely countries such as Chile will need to replace volumes from the US with shipments from refineries in Asia, Smith said. To wit, clean product flows from the Asia-Pacific region to Chile, Ecuador, and Peru were at a three-month high in December.
East Coast Impacts
Meanwhile, US East Coast clean product imports from the Asia-Pacific region — comprised almost entirely of jet fuel and gasoline — have dropped to zero, according to Kpler’s data. The last cargoes to arrive were in July last year.
The drought has completely disrupted a dynamic market that sources say was once structural: large tankers would discharge cargoes first along the US West Coast and then traverse the Panama Canal, unloading the remainder along the US East Coast.
“The drought is preventing tonnage from the Pacific moving into the Atlantic,” one shipbroker said. That also keeps those tankers from picking up cargo along the US Gulf Coast.
The Panama Canal drought is a wall keeping owners from deploying their fleets,” the shipbroker said.
The situation remains fluid, however, with some market players saying congestion at the canal is easing. The Canal Authority has increased the number of vessels that can cross, although levels are still below normal.
The Importance of the Panama Canal to Crude Oil Shippers
The Panama Canal is of immense strategic importance to crude oil shippers for several reasons. Firstly, it significantly reduces the voyage time for oil tankers traveling between the Atlantic and Pacific Oceans. By using the canal, vessels can bypass the lengthy and treacherous route around the southern tip of South America, thereby saving time and reducing shipping costs. This efficiency is particularly valuable in the global oil trade, where timely delivery is crucial. Secondly, the canal’s expansion, completed in 2016, allows for the passage of larger vessels, known as New Panamax ships. This expansion means that more crude oil can be transported in a single journey, enhancing the overall efficiency of oil shipping. Furthermore, the canal serves as a key route for the transportation of oil from the Gulf Coast of the United States to the fast-growing markets in Asia and the Pacific, solidifying its role as a critical artery in the global energy supply chain. Lastly, in the context of global trade, the Panama Canal aids in stabilizing oil prices by enabling more direct and cost-effective transportation routes, thereby playing a vital role in the world’s energy logistics