NEW YORK (TheStreet) -- Natural gas futures are soaring Monday on speculation the government will report a record decline in natural gas inventories on Thursday.
Traders are betting that the recent cold temperatures in the U.S. resulting from the polar vortex will reduce inventories of the heating fuel significantly.
For speculators, traders, and investors looking to profit, there are various ways to invest in natural gas. They include long and short exchange-traded funds such as United States Natural Gas (UNG) - Get United States Natural Gas Fund LP Report and ProShares DJ-UBS UltraShort Natural Gas (KOLD) - Get ProShares UltraShort Bloomberg Natural Gas Report.
Stocks include Cabot Oil and Gas (COG) - Get Cabot Oil & Gas Corporation Report and Southwest Energy (SWN) - Get Southwestern Energy Company Report, two of the top producers in the U.S., to Octagon 88 (OCTX:OTC) and Americas Petrogas (APEOF:OTC), two small-caps with promising production and holdings.
Analysts at Citi Futures Perspective estimate that supplies may have declined by 303 billion cubic feet in the week ended Jan. 10, according to a Bloomberg report. Such a decline would be larger than the 285 billion decrease reported in December. The Energy Information Administration plans to report last week's numbers on Thursday.
Long-term investors should be bullish about Octagon 88, Americas Petrogas, Southwest Energy, and Cabot Oil and Gas.
Southwest Energy is one of the largest natural gas producers in the U.S. With its low cost basis, Cabot Oil and Gas makes money even when natural gas prices are low. Americas Petrogas is a small-cap that has increasing production. The reserves of Octagon 88 in Canada are very promising with drilling moving along.
Prices of these stocks have soared due to bullishness in the sector.
Southwest Energy has risen by 18% over the last year. Over that period, Cabot Oil and Gas has spiked by nearly 55%. For the last year, Octagon 88 is up more than 86%. Americas Petrogas has more than doubled in the last six months.
United States Natural Gas, the main exchanged-traded fund, has risen by about 8% over the past year.
For traders and speculators, ProShares DJ-UBS UltraShort Natural Gas uses leverage to magnify bets against natural gas.
So does the Velocity Shares 3X Inverse Natural Gas (DGAZ) - Get VelocityShares 3x Inverse Natural Gas ETN Report. As a result, both pretty much trade in an inverse relationship with Velocity Shares 3X Long (UGAZ) - Get VelocityShares 3x Long Natural Gas ETN Report, another exchange-traded fund that goes long. ProShares DJ-UBS UltraShort Natural Gas is down more than 33% for the last year. Velocity Shares 3X Inverse Natural Gas fell nearly 60% for that period, too.
Investors need to be aware that ETFs that track natural gas don't always move in the direction one might initially assume.
Even with all of the speculation about cold weather boosting demand for natural gas, both "short" funds have soared in recent market action and United States Natural Gas has fallen.
ProShares DJ-UBS UltraShort Natural Gas is up more than 12% this week and nearly 5% for the month, with Velocity Shares 3X Inverse Natural Gas soaring by nearly 18% this week and 6% for the month.
By contrast, United States Natural Gas is down almost 6% for the last week and more than 4.5% for the past month.
That's because United States Natural Gas has to roll over contracts, which means the new assets purchased will be much more expensive due to soaring natural gas prices.
ProShares DJ-UBS UltraShort Natural Gas and Velocity Shares 3X Inverse Natural Gas are up as short positions will be cheaper to establish.
Speculators are also establishing positions anticipating a price drop for natural gas when the demand cools down as the weather gets warmer.
Nearly half the homes in the U.S. use natural gas for heating, the Department of Energy has said, according to Bloomberg.
For investors, traders, and speculators, watching the weather reports can lead to profitable investing in the natural gas sector through a vast array of stocks and exchange-traded securities.
Jonathan Yates does not have a position on any of the stocks mentioned in this article.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
Jonathan Yates has written for numerous publications including Newsweek and The Washington Post. He is a former general counsel for a publicly traded corporation. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.