CHICAGO (Dow Jones)--Ethanol futures prices have rebounded from last fall's lows on improved market fundamentals, and better demand prospects should keep them firm in the near term, according to analysts.

Ethanol prices rallied on a combination of higher crude oil/gasoline prices and the passage of new energy bill late last year, said Ron Oster, alternative energy analyst at Broadpoint Capital in St. Louis . Spot month crude oil futures prices have risen sharply from the $70-a-barrel level last fall to nearly $100, partly on geo-political concerns, and gasoline prices have followed, providing underlying support for ethanol Last fall ethanol prices declined as the fuel additive encountered a "blending wall," with ethanol supplies outpacing the Renewable Fuels Standard of 4.7 billion gallons that was required to be blended into the nation's gasoline supplies. Since trading below $1.60 a gallon, nearby ethanol futures have moved as high as $2.20 a gallon recently, a gain of 37.5%.

The energy bill increased the ethanol blending requirement from a mandate of 5.4 billion gallons in 2008 to 9.0 billion gallons, effective at the beginning of the year, providing strength for ethanol prices, said Oster. Although the new energy bill is positive for prices, demand for ethanol late in 2007 is responsible for much of the recent increase in prices, said Dave Wilson, a Morgan Stanley vice president. "The increase in ethanol prices has been driven by economics," he said. At one point in November cash gasoline was trading at nearly a 60-cent premium to ethanol, which encouraged blending companies to step up their use of ethanol, increasing their profits and supporting prices. Since then the spread between the two has narrowed to a 20-cent premium, Wilson said. Despite the increase in prices since last fall's weakness, neither analyst expects the price rally to lead to additional ethanol plant capacity beyond what already has been announced. Plants that were mothballed last fall are probably not going to be restarted any time soon, said Wilson . Breakpoint Capital's Oster agrees and said that despite the earlier publicity surrounding the suspension of several plant construction projects, overall ethanol industry capacity is expected to increase, with an additional 3.0 billion gallons coming on line by the end of 2008.

 Ethanol Price Outlook Mixed

Ethanol will follow the fortunes of crude oil/gasoline prices, with demand and input prices also determining prices, both analysts said. Ethanol and gasoline prices are highly correlated, but the corn product should continue trading at a discount to gasoline, said Oster. If crude oil/gasoline prices continue to rally, ethanol prices will continue to firm, he said. Ethanol should benefit from additional demand for fuel in the upcoming summer driving season, said Wilson . People drive more in the summer than any other part of the year and that should help support prices, he said.

Ethanol prices also depend on the value of corn, ethanol's primary feedstock. Nearby corn futures recently set 12-year highs and it is "currently in a battle for acreage with soybeans," said Wilson . It depends on what plants are paying for cash corn. If ethanol plants are buying cash corn at $4.50 a bushel and ethanol is at $2.15 a gallon, plants may be breaking even but remain cash-flow positive and will continue to produce. At prices above that level it will depend on each plant's efficiency and cost structure, and the price of ethanol, he said. One bushel of corn produces approximately 2.8 gallons of ethanol. Friday, the U.S. Department of Agriculture reported lower-than-expected corn production and stocks, underscoring a tightening supply situation, with corn rallying sharply on the news. The higher corn prices will hurt margins but ethanol prices are closely tied to gasoline prices, not corn. At current prices ethanol companies will continue to produce ethanol, said Oster. Currently margins are cash-flow positive, but if corn prices increase enough to force negative cash margins, there could be some scaled-back production and additional delays in plant construction, said Wilson. Friday, CBOT March corn settled 20 cents higher at $4.95 a bushel. Any move to a recession by the U.S. economy would reduce energy demand, putting downward pressure on gasoline as well as ethanol prices, Oster said. In addition, if more capacity comes on line quicker than expected, that could also depress ethanol as underlying supplies increase. Demand from the southeastern U.S. also is expected to be a key determinant for ethanol prices. Several southeastern states, including Florida, that didn't blend ethanol into gasoline prior to 2008 due to state regulations can now do so, said Wilson. Analysts estimate demand from Florida and other southeastern states could eventually reach 3.0 billion gallons. Spot-month February ethanol closed 9 cents higher at $2.21 a gallon Friday.