Two of the world's most important shipping lanes have been gummed-up by the Iran War, and a third is now having its own problems because of weather. The slowdown could drive up prices for everything from oil to home goods.

The Panama Canal is starting to reduce its capacity because of the onset of El Niño, a weather pattern that can cause severe droughts and other extreme weather events.

Last week, the canal authority warned clients the chances of a severe El Niño system had risen to 81% from 25%. For now, the canal authority is reducing capacity to around 34 vessels a day, down from its normal 36. But more severe restrictions could be in store, given the history of how El Niño impacts the Panama Canal.

In 2023 and 2024, the last time El Niño hit, transports were sometimes cut in half to 18 a day -- and this El Niño could be even more extreme than the last one. A drop in shipments could have a significant impact on U.S. goods trade, about 12% of which uses the canal by volume, according to the United Nations.

The canal is sensitive to droughts because it is fed by freshwater lakes with levels that vary depending on rainfall. During severe droughts, navigating the canal becomes much trickier, and the authority limits how many ships can pass.

The canal restrictions come at a time of extreme stress in global shipping. Traffic through the Strait of Hormuz and the Bab al-Mandab Strait in the Middle East is already curtailed because of attacks by Iran and the Iran-linked Houthi faction.

Only 10 ships traversed the Strait of Hormuz on Sunday, versus the 100 or so that went through on a daily basis before the war, according to Kpler. And only 14 made it through the Bab al-Mandab to or from the Red Sea, about half the normal cadence.

Both of those waterways are vital for energy products such as oil and liquefied natural gas. International oil prices jumped above $100 per barrel last week, but were down 9% to $88.42 a barrel as of Monday afternoon, because of a pause in fighting between the U.S. and Iran.

When transit routes are snarled, consumers often have to pay the bill, or wait much longer for products. Ships that can't take European goods through the Bab al-Mandab Strait to Asia, for instance, generally have to go all the way around Africa, a journey that adds weeks and can cost millions of dollars in extra fuel.

If ships from Asia can't get through the Panama Canal to the East Coast, they have to unload on the West Coast and pay extra for truck transport, or find another route.

In 2024, when the Suez Canal and Panama Canal were both operating at reduced capacity, J.P. Morgan estimated the blockages could increase core goods inflation by 0.7 percentage points.

Depending on how long the current reductions last, investors should brace for a similar, or even larger, impact.

Write to Avi Salzman at avi.salzman@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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July 27, 2026 16:14 ET (20:14 GMT)

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