Severe droughts affect critical shipping arteries, sending more disruption to energy markets

Severe droughts are exacerbating disruptions to two of the world's most critical shipping routes, further stressing energy markets already reeling from the Strait of Hormuz closure, according to Wood Mackenzie's VesselTracker data. The Panama Canal is experiencing a tightening corridor, with transits falling from around 325 per day to as low as 271 in late May, before partially recovering to approximately 308 per day in June.

This reduced capacity forces vessels to either operate below capacity, compete for transit slots, or reroute through the Cape of Good Hope, adding 10 to 15 days to voyage times and driving up freight costs. LNG, LPG, and refined products are the most directly impacted by these canal constraints, as the Panama Canal connects US Gulf Coast export terminals to Pacific basin demand centers.

Meanwhile, Europe's Rhine, Europe's key inland energy artery, is also feeling the strain of drought conditions, with water levels at a critical chokepoint dropping to record lows. Barge capacity has plummeted to around 25% of normal levels, and freight rates have surged, posing potential risks to inland refiners' margins if drought conditions persist through the historically dry months of August and September.