It’s not for the faint of heart, but there’s a growing feeling among some commodity investors that the often-volatile natural gas market may be the place to be in 2010.

“This is probably the next big sleeper play,” said trader Kevin Kerr, head of Kerr Trading International.  “It’s just been crushed.”

In fact, the word may already be out. Natural gas futures soared on Monday, driven higher by predictions that the market has reached its bottom and speculation that demand will increase as the weather gets colder.

Natural gas for October delivery on the New York Mercantile Exchange settled 33.7 cents, or 11.4%, higher at $3.297 a million British thermal units. Contracts for December delivery closed just below $5.

As is the case with all commodities, it’s all about supply and demand. For much of the past year, supplies of natural gas have wildly outstripped demand. Consequently, gas prices on the New York Mercantile Exchange have plunged more than 75% from last summer’s highs.

Anyone looking for evidence that demand has fallen sharply can take a look at the underground caverns where natural gas is stored. Data shows that those underground storage caverns currently hold 17% more natural gas than they held a year ago.

And that’s hardly surprising, given that U.S. industrial demand has fallen due to the recession, and mild weather through the summer has curbed use by utilities.

Natural gas is primarily used to generate electricity, Kerr explained, and the recession has caused companies to close large facilities such as factories and auto plants. That has reduced the amount of electric wattage and dampened the use of natural gas used to produce that electricity.

Cool summer weather across most of the U.S. has also scaled back the need for air conditioners in homes, another significant factor that has contributed to the surplus of natural gas. And that mild weather has continued into the fall.

But it’s precisely this overwhelmingly bearish market that seems to have set the stage for an impending turnaround.

The market hit a nearly eight-year low two weeks ago, and traders have since been rushing in seeking bargains. The bearish news, mixed alternately with traders seeking profits, has made for a wild ride in recent weeks.

Traders can’t seem to make up their minds whether excess supplies will keep prices low, or whether the onset of winter, low levels of production and optimism for an economic rebound will send prices higher.

Kerr is an advocate of the latter. But a lot depends on the weather, he said. 

“If we have a cold winter, we could eat through a lot of the existing supply. If that happens, by the end of first quarter and moving into the second quarter [of 2010], demand is going to ramp up but supplies will remain low.”

That could also be good news for natural gas companies such as NSTAR (NST), whose stocks have been almost as volatile as the natural gas market.