The commodities world goes in cycles, from boom to bust. At times, the price of a commodity falls so low that it cannot be produced cost effectively. Then, the commodity producers will drastically reduce production and eliminate projects. These actions will eventually lead to the particular commodity’s price climbing higher again.

Natural gas has recently gone through the bust phase as its price had fallen 75% over the past few months. However, there are reasons to be optimistic that natural gas prices will head higher. First and foremost, supplies of natural gas are being slashed. The number of natural gas rigs in the US has been slashed nearly in half. Less than a year ago, there were 1,600 rigs in the US pumping out natural gas. Now there are less than 900 rigs in operation, a level last seen five years ago.

Another important factor regarding natural gas is the cost of

After an unparalleled fall, natural gas prices could double by next year, as a growing number of idle rigs create a supply crunch.

Natural gas prices have tumbled by about 30% this year, as a steep drop in industrial consumption has undermined demand. However, many of the traders and hedge funds that placed speculative bets on the price decline are beginning to reverse course and bet on a price spike, as dwindling production is starting to outpace slumping demand.

Traders trimmed their net short positions on gas by 11% to 114,064 in the week ended March 10, the smallest since last July, Bloomberg News reported. Also, natural gas futures for delivery in January 2010 are trading at a 49% premium to the April contract, which means speculators are anticipating a price surge.

In its short-term energy outlook - released on March 10 - the Energy Information Administration said

If you know how to play the volatile nature of the commodity sector, this article is not for you. Lee Lowell of the Smart Profits Report gives three reasons why commodity investing has changed for the better, and how to profit from them.

This from Lee:

In this globalized world, it’s no surprise to see the world’s financial markets intertwine in some fashion. That’s why we continue to see volatility run at much higher levels - be it in the stock market or commodities sector.

In the past, the physical and agricultural commodities have typically had very loose ties to the movement of the stock market. After all, why would the falling share price of Dell Inc. (Nasdaq: DELL) have anything to do with the price of corn or sugar? Ordinarily, no reason at all - but it’s not as simple as that any more…

A Changing Commodities