U.S. ethanol margins show signs of strength -Citi

NEW YORK, Dec 11 (Reuters) - U.S. ethanol margins rose a few cents a gallon last week as natural gas -- a key input cost -- fell and on stronger prices for the alternative motor fuel, a Citigroup report said on Tuesday.

Average ethanol margins rose 2 cents a gallon to 30 cents and have risen 26 cents over the past 10 weeks since bottoming at 4 cents a gallon back in late September, said the report, which gave a brighter view on ethanol profits than many other analysts have given.

Most ethanol producers use natural gas to fire their biorefineries. Natural gas futures have mostly fallen since late last month on strong supplies and on weaker petroleum prices. Gas prices have fallen from a settlement of more than $8.02 per million British thermal units on Nov. 26 to a settlement of $7.15 on Friday. They ended at $7.085 on Tuesday.

Citi analyst David Driscoll said ethanol has also been supported by historically low supplies.

"Thus far, industry participants continue to indicate that ethanol is being fully blended, which is being confirmed by industry-level inventory data," Driscoll in the report.

Days of ethanol supply for September, the last month numbers were available, increased modestly by three days to 26, but was below the industry's average historical days of inventory level of 32 days, the report said.

The Citi view on supplies countered other analysts, who have said that the 35 percent jump in U.S. ethanol capacity since Jan. 1 has led to a glut in production hubs, especially the Midwest.

CORN PRICE A HEADWIND

Spiking corn prices are a "headwind" for ethanol futures, but were outweighed by solid ethanol prices last week, the report said.