It’s possible that you've never heard of the ProShares UltraShort Bloomberg Natural Gas (KOLD) exchange-traded fund (ETF). It only trades an average of about 41,000 shares per day and has returned -11.85% over the past three years. Add a 0.95% expense ratio and there doesn’t seem to be much reason to consider it as a trade or investment.

On the other hand, this ETF, which seeks daily investment results that correspond to two times the inverse (-2x) of the daily performance of the Bloomberg Natural Gas Subindex, has appreciated 95.11% over the past year. Is it possible for that kind of run to continue? (For more, see: Investing in Natural Gas? Eye ETFs, Seasonality).

Waning Energy Demand and Projections

When global demand slows it has a contagion effect that spreads back to all economies. This, in turn, is bad news for natural gas and energy as a whole. And oil's quick slide and depressed price, it’s not going to make natural gas look more appealing. (For more, see: A Natural Gas Primer).

On Jan. 2, 2014 working inventories totaled 3.09 trillion cubic feet, a 9% year-over-year increase from 2013, according to the U.S. Energy Information Administration. Combine these increased inventories with lower-than-expected demand and increased production and there is no reason to think natural gas will enjoy a significant and sustainable run higher.

On the positive side, natural gas consumption is expected to increase in 2015 and 2016 thanks to industrial and electronic power sectors. In 2015, industrial consumption (driven by chemical and industrial projects) is expected to increase 4.5%, followed by a 2.1% increase in 2016. Electric power sector consumption is expected to increase 3.2% in 2015, followed by a 1.8% increase in 2016. On the residential and commercial side, a decline in 2015 is expected to be followed by flat growth in 2016.

Overall, it’s a mixed bag. Let’s see if it’s the same story from the political angle.

Political Impact on Natural Gas

Since 2006, natural gas production has increased 37%, which puts production near record levels. The industry is often confused by President Obama’s stance on natural gas. Will current policies have an impact on the future of natural gas?

President Obama is not a friend of coal, which makes him a friend of natural gas by default. At the same time, he wants to cut methane emissions by up to 45% by 2025. This is in an effort to help curb global warming. However, partially in thanks to improved efficiency throughout the natural gas industry, methane emissions have fallen 40% since 2006. The Environmental Protection Agency (EPA) estimates that methane emissions from fracking were down 73% between 2011 and 2013, and that natural gas is a better option than coal. This is all while natural gas production had increased, which proves the improved efficiency. (For more, see: How Fracking Affects Natural Gas Prices).

The Bottom Line

There are just as many questions as answers in regards to the direction of natural gas. However, when you combine reduced demand, increased supply and a potentially anti-natural gas stance in Washington, the odds of natural gas enjoying any type of sustainable spike appear to be very low. That being the case, KOLD might present an opportunity because upside potential will outweigh downside risk. On the other hand, the elevated expense ratio and extreme historical volatility for KOLD should lead to investor caution. (For more, see: Opportunities in Natural Gas).

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.