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Although temperatures are quite cool here in Chicago, there is some hope that temperatures will get back into the 70’s later in the week. There is also speculation that other major markets like New York will see similar temperatures, while big Southern cities could see 90 degree weather later in the week as well.

This burst of warm weather could definitely boost electricity demand across the region putting natural gas in focus. And thanks to a shutdown of some rigs in the Gulf of Mexico due to a tropical storm, supplies may be curtailed in the short term, further putting natural gas in the spotlight.

Natural Gas Futures

This speculation and a short-term decline in supplies helped to boost natural gas prices in Monday trading. Futures for the commodity on the NYMEX were trading around the $3.65/mm btu mark, representing an increase of about 3.7% for the session.

This is important because October, when there isn’t a big hurricane in the Gulf, generally represents a time of big supply increases for natural gas. The period usually sees very mild weather across much of the country, and without increased electricity demand thanks to more heating or cooling usage, supplies can really build in this time frame.

However, if the current weather forecasts hold true, we could see a bit more usage of natural gas in the week ahead, largely thanks to air conditioning and its impact on electricity usage (also read the Comprehensive Guide to Natural Gas ETFs).

Downside Risk

Even with this bullish natural gas prediction, investors should remember that the past few weeks haven’t been too kind to the natural gas market. Supply increases have come in ahead of expectations for both of the past two weeks, including a 101 billion cubic feet build in the past week alone.

This suggests that the pop might be short-lived in the natural gas market, though more hot (or cold) weather could definitely extend this rally for a bit longer. Either way, investors should definitely keep a close eye on products tracking the space, as these could be some uncorrelated ways to trade during the current debt ceiling and budget debacle, and may very well provide some decent gains in the days ahead:

Natural Gas ETF Options

Easily the most popular way to play natural gas in exchange-traded form is with the United States Natural Gas Fund (UNG - ETF report). This product has over $850 million in assets under management and sees an average daily volume approaching five million shares a day.

This ETF added about 3.5% in Monday trading, and thanks to the move is now trading in the green for the trailing five day period, suggesting that a bit of a reversal has taken place lately (Read The Key Differences Between Natural Gas ETFs).

However, if you are really keen on natural gas prices advancing over the next few days, a leveraged bet may be in order. Two ways to do this are with the 3x Long Natural Gas ETN (UGAZ - ETF report) and the ProShares Ultra DJ-UBS Natural Gas ETF (BOIL - ETF report).

These products offer, respectively, 3x and 2x daily rebalancing exposure in the natural gas futures market. UGAZ added about 10.5% in Monday trading, while BOIL moved higher by nearly 7.1%.
Meanwhile, on the short side—for those who believe that the natural gas strength is overblown—there are some leveraged inverse options as well.  These include the VelocityShares 3x Inverse Natural Gas ETN (DGAZ - ETF report) and the ProShares UltraShort DJ-UBS Natural Gas ETF (KOLD - ETF report).

DGAZ was down about 10.5% in Monday trading, while KOLD had declined nearly 7.1% on the session, roughly mirroring their long-leveraged counterparts in the process. Still, both of these products are up from a one-month look, showcasing that longer-term bets can favor the bears in the usually-contangoed natural gas market (See 2 Ways to Short Natural Gas with ETFs).

Either way though, these products look to be in focus for the rest of the week, and especially on Thursday when the EIA releases the weekly supply data. This news will probably move the natural gas markets, and the above products will definitely be in focus once again when this happens.

Bottom Line

Natural gas ETFs have been weak lately, as mild weather and a lack of Gulf storms pushed supply injections to new heights. However, thanks to a small storm and warm weather in much of the nation, this trend could be reversing in the near term (see all the Energy Commodity ETFs here).

This suggests that traders should take a closer look at natural gas ETFs in the days ahead, as these could definitely be volatile plays capable of big moves, depending how the weather plays out. And with the ongoing dysfunction in D.C., a natural gas play could be one way to avoid budgetary troubles while still staying in the markets in the short term.

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