Natural gas has become a commodity traders love to hate. Due to hydraulic fracturing (fracking), which has boosted the US natural gas supply, prices have been trending downward for three years. In the past year, they’ve hovered between $3 per million cubic feet (mcf) and $4/mcf.

This spring, however, natural gas prices broke out, moving up to $4.25-$4.45/mcf by early May, due to seasonal demand factors and fewer rigs producing natural gas. Goldman Sachs (NYSE: GS), which had been bearish on gas, recently said it’s a “buy,” igniting further speculation.

The long-term trends are positive. Natural gas is regaining favor as an input in a number of industries, from fertilizer to plastics, as well as electricity production, and as an alternative fuel for buses and trucks.

The biggest long-term driver of prices, however, is likely to be US gas exports, in the form of liquefied natural gas (LNG). Such exports are quite low now, averaging about 3.5 billion cubic feet daily. But they’re expected to ramp up as the new LNG facilities being built come online in the next several years.

By 2020, the US will have the capacity to export close to 6 trillion cubic feet of LNG daily, according to Moody’s Corp (NYSE: MCO). In comparison, total exports of LNG by all countries averaged 12 trillion cubic feet/day in 2011.

US gas exports aren’t a done deal yet, however, due to concerns that increased export volume will create an unacceptable increase in domestic natural gas prices. But the Department of Energy estimates that foreign gas sales could add as much as $47 billion to the US economy, a big incentive to begin exporting.

Trading Places

There are very few ways to invest directly in the price of natural gas. So we have in the past recommended the shares of indirect beneficiaries, such as gas storage and transport providers, including Genesis Energy LP (NYSE: GEL) and the ALPS Alerian MLP ETF (NYSE: AMLP).

For those with a high tolerance for risk, there’s a more direct option: United States Natural Gas LP (NYSE: UNG). This is essentially an exchange-traded fund that’s set up as a master limited partnership (MLP). To get exposure to gas, the fund invests in natural gas futures contracts that are one-month out. So it is not a proxy for the spot price of natural gas, and it does not pay out any income.

Because of market liquidity and the absence of carrying costs, using futures is in many ways a better way to invest in natural gas than owning the commodity directly.

But there are some serious drawbacks. As each month draws to a close, UNG must sell its soon-to-expire position and purchase a new contract further out. The problem is that the new contracts sometimes cost more than the ones sold (and vice versa). This disparity can cause the fund to post losses that have nothing to do with natural gas prices. During 2012, for example, UNG dropped 27 percent at a time when natural gas spot rises were up more than 15 percent.

Launched in 2007, UNG has lost money most of its existence: the three-year annualized return is a negative 26 percent. But 2013 has been different. The fund is up about 16 percent so far this year (although with high volatility). And we think it could finish 2013 even higher.

Note: Since UNG is a master limited partnership (MLP), shareholders receive a K-1 tax form each year, instead of the regular 1099.