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Panama canal issues affecting tanker market

Panama canal issues affecting tanker market
Monrovia NSU CHALLENGER bulk carrier transits the expanded canal through Cocoli Locks at the Panama Canal, on the outskirts of Panama City, Panama April 19, 2023. REUTERS/Aris Martinez/File photo

The Panama Canal is facing significant delays due to low water levels, and this is causing major issues for both the supply chain industry and the tanker shipping market. These delays are becoming a headache, especially as we approach the holiday season.

The problem with the low water levels in the Panama Canal is twofold. First, it’s causing ships to wait longer before they can cross the canal, increasing transit times. Second, it’s leading to an increase in the number of vessels waiting to cross. This situation has several implications.

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One major consequence is that ships may have to sail an additional 10,000 nautical miles around Cape Horn and the Magellan Strait if they can’t pass through the Panama Canal promptly. This not only increases fuel consumption but also extends the time it takes for goods to reach their destinations. This has a ripple effect on vessel earnings, supply chains, and greenhouse gas emissions. Additionally, canal transit fees have gone up due to an auction system that allows non-prebooked vessels to pass through.

So far, much of the attention has focused on the dry cargo, container, LPG, and LNG sectors, but the tanker market is also affected. For smaller and more versatile MR tankers, which often rely on canal transit for local market dynamics, there has been volatility in the number of vessels waiting to cross. This could result in reduced regional flows or more logistical challenges. Larger tankers, on the other hand, are less affected by canal issues, even in normal market conditions.

For MR tankers, canal problems have actually supported higher freight rates in the US Gulf during August. If delays continue beyond September, this tanker sector is likely to be the most impacted. This could lead to tighter flows between the US Gulf, West Coast South America, and the US West Coast. However, it’s not economically attractive to divert an MR tanker around Cape Horn, so the best solution is a return to normal transit times or increased prebooking to optimize sailing days. Unfortunately, there are limitations on how many of each vessel type can cross the canal per day, making preference for these tankers unlikely.

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As for crude oil flows, they are not significantly affected because relatively low volumes pass through to the Pacific side of the canal, and most US Gulf crude loads onto VLCCs, which cannot use the canal.

Looking ahead, several outcomes are possible. Regional tonne miles may increase, leading to lower vessel availability from the US Gulf. Canal delays could encourage more freight from the Far East due to better pricing and transit times. If these water shortages and delays become seasonal due to climate change, it could add complexity to the market and require advanced planning for future quarters, potentially increasing volumes in Q2 depending on storage capacity and demand levels.

While rainfall in Panama is expected to improve in the second half of September, bringing relief and a return to normal canal traffic, the tanker market remains mostly unaffected, except for regional MR tankers. The industry is keeping a close eye on what conditions the next year may bring.

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