Morgan Stanley argues that the recent 35% drop in U.S. natural gas prices from December highs is overdone. Analyst Devin McDermott points to improving demand fundamentals and limited supply growth as reasons for a potential rebound.

Prices fell to around $3.40 amid warmer weather forecasts and a slight supply increase. However, production gains have stalled, with January output already down 0.3 bcf/d. Meanwhile, LNG demand continues to climb, reaching 19.3 bcf/d.

The bank raised its 2026 price forecast to $4.25, roughly 22% above current futures. It expects continued LNG growth and anticipates new export capacity from Golden Pass. Storage levels are also trending higher, supporting a tighter market balance.

Investors should watch rig count trends and weather patterns closely. If colder temperatures return or supply disappoints, prices could quickly reverse their recent declines.