Natural gas prices and exchange traded funds (ETFs) have staged a nice rally since the price of the fuel hit a seven-year low earlier this month. How can investors capitalize?

David Bogoslaw for BusinessWeek notes a few things investors looking to play natural gas should look out for:

• For those who believe that the price of natural gas is going to reach at least $7 by 2011 or 2012, then there’s probably some room for those stocks to grow
• There’s skepticism about higher prices, since natural gas storage levels are currently more than 16% higher than what they’ve historically been
• The high supply has been driven by lower industrial demand, thanks to the recession, and less consumption, because of an unseasonably cool summer
• Prices could be volatile from now until November, so be sure to have an exit strategy
• Shares of exploration and production companies didn’t suffer as much when prices fell; in fact, large- and mid-caps have appreciated 57% year-to-date as of Sept. 15

Other points in favor of natural gas this winter include:

• Demand for natural gas usually picks up in the fall and tops out between January and February. An El Nino weather pattern may produce colder-than-expected winter this year.
• Natural gas prices may also go up because of a drop in production as a result of declining exploration.
• Output may drop 3.5%  in 2010, and gas rigs working in the United States dropped 56% to a total of 699 as of last week.
• The depreciating U.S. dollar will increase demand for U.S. grains and food-products, and the higher demand for grain

There are several ways to play natural gas, including through both the exploration and production ETFs as well as through ETFs that hold futures:

• First Trust ISE-Revere Natural Gas (NYSEArca: FCG): up 44.2% year-to-date

• United States Natural Gas (NYSEArca: UNG): down 49.8% year-to-date

Tags: Commodity ETFs, Energy, FCG, Natural Gas, Sector ETFs, UNG