U.S. natural gas prices upside likely in 2026

U.S. natural gas prices have recently fallen, down 9% over the last month and 13% year-to-date, driven by a persistent storage surplus, mild weather, and robust supply leading to above-normal inventory builds. Despite this near-term weakness, Morgan Stanley maintains a constructive long-term outlook, forecasting Henry Hub prices to exceed $5, though they have pushed back the expected timing to 1H26 from 2H25. This revised timeline reflects insufficient investment in drilling activity to meet rising LNG demand and the potential for current low prices near $3/MMBtu to defer further rig additions, solidifying expectations for above-average inventories entering winter 2025-26.

Analysis

U.S. natural gas prices are exhibiting significant near-term weakness, having declined 9% over the past month and over 13% year-to-date. This downturn is attributed to a persistent storage surplus, a consequence of above-normal inventory builds during the April-June period driven by mild weather, robust supply, and extensive LNG facility maintenance. According to analysis from Morgan Stanley, while July storage trends normalized, they were insufficient to erode the existing surplus, making above-average inventories heading into the 2025-26 winter season increasingly probable. Despite this bearish short-term setup, Morgan Stanley has reiterated a constructive long-term outlook, although it has deferred its price forecast. The firm now anticipates Henry Hub prices will exceed $5/MMBtu in the first half of 2026, a delay from its previous 2H 2025 projection. This long-term bullish thesis is predicated on a structural deficit, where current investment and drilling activity levels are deemed insufficient to meet rising LNG export demand, a situation potentially exacerbated as current low prices near $3/MMBtu may defer further rig additions.

Key Decisions for Investors

• Investors should distinguish between the current bearish market sentiment, driven by high storage levels, and the deferred but still constructive long-term outlook, which presents a potential opportunity for those with a longer time horizon.
• It is prudent to closely monitor leading indicators such as drilling rig counts and progress on LNG export capacity, as a slowdown in rig additions at current price levels would reinforce the long-term bullish thesis.
• Given the delayed timeline for the expected price recovery to 1H26, investors considering long positions in natural gas futures or related equities may adopt a patient, phased approach, using periods of price weakness to build positions rather than chasing short-term movements.