Energy prices are going haywire. The price of natural gas in the UK has doubled since August. In the first seven days of October alone, prices in Asia rose 62%. Coal shipped out of Newcastle soared 27% last month.

Rising energy costs worry just about everyone. Economists are concerned higher prices will crimp growth. Last Thursday, the bank ING downgraded its fourth-quarter GDP forecast for China to 4.5% from 5% as electricity restrictions hit a third of the manufacturing sector. Central banks worry higher energy prices could make transitory inflationary stick. Environmentalists look on with dismay as coal plants in the UK are turned on ahead of winter. For everyone else it’s the prospect of a monster heating bill or more at the pump.

Energy investors are among the few cheering. Energy was the best performing sector in the Morningstar Australia index in September, rising 14% even as the index fell for the month. The S&P 500 Energy is up 50% year-to-date. Whitehaven Coal (ASX: WHC) gained 106.6% this year.

In today’s Charts of the week, we unpack what’s driving the current ruction in energy markets.

OPEC and US shale producers are holding back

Natural gas and coal have captured headlines, but oil prices are rising steadily too. Brent crude, the global benchmark for oil prices, is up 15% since August. It’s hovering at its highest level since 2018 as driving and flying recover with the economic reopening.

Prices are rising because OPEC, a cartel of 13 oil-producing nations, and the US shale oil industry have not increased supply in line with demand, says Allen Good, a Morningstar energy strategist.

“Demand is recovering, and supply hasn’t kept up. OPEC and US shale producers simply haven’t increased in line,” says Good.

OPEC missed production quotas for the fourth straight month in August and production grew by just over 100 million/barrels per day (mb/d), a quarter of the 400mb/d planned.

The oil cartel, which includes Saudi Arabia and Venezuela, controlled 79% of crude oil reserves in 2018.

US shale producers, the other group able to quickly ramp up production, have also held off so far. Many of the largest operators have promised shareholders they’ll keep expansion restrained, says Good.

Europe and China scramble for natural gas

The spike in natural gas prices is a global story ranging from wind farms in the North Sea to a Russian gas pipeline in the Baltic and trade tensions between Australia and China.

Europe is at the frontline of the natural gas crisis. Economic reopening and the upcoming winter increased demand even as renewable energy output slumped due to lower wind speeds and carbon pricing increased the cost of coal.

The UK has been hard hit because it has less storage capacity and is more reliant on natural gas. It makes up 37% of electricity generation versus 19% for the broader European Union, according to data from Ember climate.

The situation has been exacerbated by supply uncertainty. Gazprom, the Russian state-controlled energy exporter that supplies the continent with 34% of its gas needs, held off adding supply beyond what was agreed in long-term contracts.

Ukraine accused Russia of using gas to “blackmail” Germany into approving Nord Stream 2, a Russian gas pipeline through the Baltic to Germany.

After spiking more than 40% in early trading last Wednesday, natural gas prices closed 9% lower after Russian President Putin hinted more gas would be forthcoming.

China has added to European price pressures by snapping up natural gas shipments to plug its own energy crisis, says Good.

Blackouts have hit several provinces as power generators battle skyrocketing fuel costs, coal shortages and energy consumption targets designed to reduce emissions, according to a report by S&P Global.

Coal shortages follow last year’s decision to restrict imports of Australian thermal coal, which totalled 42.5 million tonnes in 2020, according to Argus Media.

The global run-up in energy prices is taking place two weeks before the UN’s 26th Climate Conference—COP26—is due to kick off in Glasgow. In the lead up some have blamed the current crisis on underinvestment in new natural gas projects due to pressure from environmental groups and ESG-conscious investors.

But Good says hesitation around new natural gas projects has more to do with capital discipline than kow-towing to environmentalists.

“Money was spent on projects when oil was at US$100 and you had a rash of overspending. Share prices and returns suffered, so companies cut back” he says.

For now, natural gas producers like Woodside (ASX: WPL) will benefit from surging prices. However, producers will get nervous if prices don’t moderate, says Morningstar senior equity analyst Mark Taylor.

“If they stay there too long, it might shift investment away from natural gas to cheaper alternatives,” he says.

“Nothing kills demand like high prices.”