Reasons to Consider Natural Gas

NEW YORK ( TheStreet) -- Oversupply in the natural gas market has taken its toll on the commodity, but some investors are flocking to it -- and for good reason.

First, the regions of the U.S. that historically have used natural gas are expected to witness colder temperatures than normal this winter. According to the National Oceanic and Atmospheric Administration, winter temperatures from southern and eastern Texas to southern Pennsylvania and down to the tip of Florida are expected to be colder than normal, which would increase demand for natural gas.

Second, macroeconomic conditions are favorable for this resource. An unstable dollar, fears of inflation and low interest rates are making commodities attractive. Many investors have jumped into gold, but crude oil and natural gas also provide a hedge against inflation and a declining dollar.

Third, expected economic growth in the U.S. and abroad is expected to boost consumption in residential, commercial and industrial sectors. Additionally, the Energy Information Administration expects total marketed natural gas production to decline by 3.1% in 2010, reducing the excess supply that has flooded the market.

Some equities that could benefit from these trends include:

Chesapeake Energy ( CHK), which closed at $22.44 Wednesday, up 66% from its March low of $13.50.

Piedmont Natural Gas ( PNY), which closed at $24.80 Wednesday, up 17% from its March low of $21.25.

The United States Natural Gas ( UNG) is a third way to access natural gas, This exchange-traded fund has had its ups and downs because it holds futures contracts and can be affected by contango or backwardation as well as regulations imposed by the Commodities Futures Trading Commission (CFTC). UNG is up 7% after hitting a low on Dec. 3.

Investing in natural gas has its risks, and a good way to mitigate these risks is through the use of an exit strategy. According to the latest data at www.SmartStops.net, an upward trend in the previously mentioned equities could come to an end at the following price points: CHK at $21.85; PNY at $23.94; UNG at $8.98. These price points change with market volatility, and updated data can be found at www.SmartStops.net.

-- Written By Kevin Grewal in Laguna Niguel, Calif.

At the time of publication, Grewal had no positions in equities mentioned.

Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.

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