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

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.