(Investing) – U.S. natural gas prices are set to continue their recent recovery into the third quarter, supported by rising LNG export flows and stronger power demand, though oversupply risks loom for 2027, according to Morgan Stanley.Henry Hub, the U.S. benchmark, had stayed below roughly $3 per million British thermal units for much of May as mild weather and softer LNG demand kept inventories around 6% above normal. Prices have since begun to trend higher, breaking back above $3, and Morgan Stanley expects that firming to continue.The bank forecast Henry Hub averaging $3.50 in the third quarter and $3.75 in the fourth, putting the full-year 2026 average at around $3.40, a slight cut from its prior forecast of $3.55, but still implying around 6% upside to the current futures curve.The near-term outlook is supported by the conclusion of seasonal LNG maintenance at facilities including Corpus Christi, Cameron and Golden Pass, as well as an expected year-on-year increase in power burn of roughly 1 billion cubic feet per day from July through September, assuming normal weather.On the supply front, Lower 48 dry gas production averaged around 107.3 bcf/d in May, down 1.2 bcf/d from April, weighed by pipeline maintenance in the Eagle Ford, Haynesville and Permian basins. Morgan Stanley said volumes had begun to recover in early June and forecast total supply growth of around 3 bcf/d for the full year.The outlook for 2027 appears more uncertain, however. “While our near-term outlook tilts slightly more constructive than consensus, we do see oversupply risks into 2027,” strategist Devin McDermott wrote.The Permian rig count rose by 14 in May alongside higher oil prices, and Morgan Stanley expects further rig additions over the coming months. That new drilling activity should translate into stronger associated gas growth in late 2026 and into 2027, coinciding with more than 4 bcf/d of new Permian gas pipeline capacity coming online.For storage, Morgan Stanley raised its end-October 2026 estimate slightly to 3.81 trillion cubic feet, roughly 1% above the five-year average, and sees end-October 2027 storage at around 3.95 Tcf, or 4% above normal.