Natural gas prices rise into Q3 on strong demand

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U.S. natural gas prices are expected to extend their recent recovery into the third quarter of 2026, supported by stronger LNG export demand and rising power sector consumption. However, Morgan Stanley warned that the longer-term outlook for 2027 is turning less supportive due to growing oversupply risks.

Henry Hub, the U.S. benchmark, remained below $3 per million British thermal units for much of May amid mild weather and weaker LNG demand. Prices have since recovered above the $3 level as market conditions begin to tighten.

Short-term outlook supported by demand

Morgan Stanley expects continued strength in the near term, driven by seasonal demand recovery and improving fundamentals across key consumption sectors.

• Henry Hub expected to average $3.50/MMBtu in Q3 2026​
• Forecast rises to $3.75/MMBtu in Q4 2026• Full-year 2026 average revised slightly lower to $3.40/MMBtu (from $3.55)

The bank said the outlook is supported by the end of seasonal maintenance at major LNG facilities, including Corpus Christi, Cameron, and Golden Pass, alongside stronger summer power demand.

Supply trends show gradual recovery

On the supply side, U.S. natural gas production has shown mixed performance in recent months.

• Output averaged 107.3 bcf/d in May
• Production fell by 1.2 bcf/d month-on-month due to pipeline maintenance
• Early June data suggests a gradual recovery in supply

Morgan Stanley expects total U.S. gas production to grow by around 3 bcf/d in 2026, driven by increased drilling activity, particularly in the Permian Basin.

2027 outlook turns more cautious

Despite near-term strength, the outlook for 2027 appears weaker as supply growth begins to outpace demand.

Key risks include:

• Rising Permian rig counts following stronger oil prices
• Expanding associated gas production
• More than 4 bcf/d of new pipeline capacity expected in the Permian region

Morgan Stanley strategist Devin McDermott noted that while near-term conditions are slightly more constructive than consensus, the market could face increasing oversupply pressure heading into 2027.

Storage levels and market balance

Storage forecasts were also revised slightly higher, pointing to a looser balance in the medium term.

• End-October 2026 storage estimated at 3.81 Tcf
• Around 1% above the five-year average
• End-October 2027 storage projected at 3.95 Tcf
• Roughly 4% above normal levels

Overall, the report suggests a market transitioning from short-term tightening conditions toward a more balanced-to-loose structure in the longer term as supply growth gradually overtakes demand.