The Panama Canal is one of the most vital waterways in the world, transporting about 5% of global trade and 15% of U.S. imports and exports. Its operation relies on a consistent supply of freshwater from the surrounding watershed, which also supplies electricity and drinking water to over 30% of Panama’s population. However, the system faces increasing hydrological stress from climate variability, including more frequent droughts associated with El Niño events, which have led to strict restrictions on maritime traffic. We develop weekly optimal water release strategies to dynamically balance navigation, hydropower, and municipal water demands amid seasonal and interannual inflow uncertainties. By testing different scenarios, we compared current management practices to an optimized strategy. Our findings show that adopting a dynamic optimal policy can improve the water allocation, making the Canal more resilient during dry periods. The optimized approach increased the supply of drinking water, stabilized shipping operations, and enhanced energy production by adjusting water use to seasonal patterns. These findings highlight the importance of flexible, adaptive reservoir management and provide a policy-relevant framework to improve long-term water governance in climate-sensitive, multipurpose infrastructure systems, such as the Panama Canal.