Some of Europe’s industrial power consumers could face blackouts this winter if natural gas prices climb any higher, analysts with Goldman Sachs Commodities Research warned this week. 

European benchmarks have soared to new heights as storage inventories remain short with colder weather approaching and traders baking in a winter risk premium. Goldman analysts led by Samantha Dart said the Dutch Title Transfer Facility (TTF) contract could balance the market at $17.60/MMBtu amid normal winter weather. That would allow for maximum gas-to-coal switching in the power sector and help normalize end-of-winter storage. 

However, the wildcard remains weather. If Europe and Asia were to face colder-than-normal temperatures, they may compete aggressively for liquefied natural gas (LNG) cargoes, which could spur another breakneck rally in prices. 

“Under such an outcome, the only balancing mechanism would be a significant further rally in European gas and power prices reflective of the need to destroy demand, with curtailed power demand in the industrial sector through blackouts,” the Goldman team said in a recent note to clients.

Both TTF and the UK’s National Balancing Point (NBP) broke through $20 last week amid a 13-day run of records that culminated Wednesday with both of the prompt contracts settling above $24. Prices corrected lower Thursday. Norwegian pipeline imports rebounded, fears eased over a cut in British power imports following a fire on a 2 GW interconnector with France and prices that could be too high for the appetites of some pushed prices down. 

“At the extreme prices the market is experiencing, demand destruction is a serious possibility, where certain industries are stopping production due to unprofitable margins,” said Schneider Electric risk associate Wolfgang Haider on Thursday. 

It’s a far cry from last year when the global gas market faced significant oversupply, which sent benchmarks to $2 and lower across the world. European storage stood at around 93% of capacity at this time last year, but inventories were at 71% of capacity this week. 

The TTF and NBP prompt contracts are at a premium to the Japan-Korea Marker (JKM). While the spread has narrowed considerably farther down the curve, Asian prices remain at a premium to those in Europe. Goldman analysts noted that European prices could ultimately respond to colder-than-normal weather this winter in the way JKM did last January, when spot prices hit $32 amid historic cold and a scramble for gas

Asian buyers have been stockpiling ahead of winter to avoid the same outcome.

“Global spot prices now sit well above what can be anchored by longer-term fundamentals (supply costs, parity with alternative fuels, and gas-coal switching) — in isolation. This is a downside risk,” Morgan Stanley analysts wrote in a recent note about the European market. “However, with winter heating season around the corner, low inventories and limited potential for fuel switching for alternative fuels creates the risk of significant upside volatility from colder than normal weather or further supply disruptions.”

Indeed, coal, carbon and fuel oil prices have all risen sharply since mid-year. Engie EnergyScan said Thursday gas-to-oil switching across Europe and Asia has been limited. Both JKM and TTF are now above fuel oil prices. However, environmental restrictions have prompted much of the peak oil capacity available to retire. LNG export utilization across the world has also remained weak this year among planned and unplanned outages. In the United States, where exports have been operating at capacity during the rally, Freeport LNG remained offline Thursday after Tropical Storm Nicholas knocked out power to all three liquefaction trains on Tuesday. There was no timeline for power restoration.