U.S. ethanol companies thrive as oil tops $100

By Timothy Gardner

NEW YORK (Reuters) - Oil's jump to more than $100 per barrel has helped boost shares of ethanol companies as interest swells in the domestic source of motor fuel, analysts said.

U.S. oil futures briefly hit a record of more than $100 per barrel on Thursday as the country's crude supplies fell for the seventh week running amid soaring global demand.

"One hundred-dollar oil eliminates a lot of problems for ethanol," Ron Oster, an analyst at Broadpoint Capital Inc in Missouri, said in an interview.

Times had been tough as recently as October for ethanol companies. A 40 percent jump in U.S. capacity to make the alternative fuel during the year lead to fears of oversupply. The doubling in prices for corn, the main U.S. feedstock for ethanol, to well over $4 a bushel also hurt profit margins and company shares.

And questions over whether ethanol made from corn cuts emissions of the main greenhouse gas, carbon dioxide, have lingered, reducing some interest in the fuel as a green replacement for gasoline.

But oil's rise of about $20 a barrel since early October, combined with mandates for a six-fold increase in ethanol production over the next 15 years in the new U.S. energy law, have pushed shares higher. VeraSun Energy shares jumped 62 percent since lows this fall, U.S. BioEnergy Corp shares were up nearly 97 percent, Pacific Ethanol Inc shares were up nearly 107 percent, and Aventine Renewable Holdings shares were up nearly 67 percent.

Shares of Archer Daniels Midland Co, the second-largest U.S. ethanol producer after private company POET, were up nearly 50 percent from its year low in mid-January 2007, though the agriculture giant is not a pure-play ethanol company.

SMOOTHING OUT BUMPY ROAD

Oil's jump may also lend limited short-term support to other alternative energy sectors like solar, wind and fuel cells, but those businesses are more affected by rises in power generation feedstocks like coal and natural gas, experts said.

Ron Pernick, a principal at research firm Clean Edge, said commercial production of fuel cells for cars could still be 20 years away.

As long as the oil price stays high, it smooths out many of the road bumps for ethanol such as the robust corn prices, analysts said. "With oil at $100, corn prices could hit $5 a bushel and companies could still make profits," said Oster.

Still, he warned that if oil falls and corn prices remain at or rise above current prices of more than $4.60 a bushel, ethanol shares could suffer again.

For now, profits are good. Average gross profit margins for every gallon of ethanol have risen to about 35 to 40 cents per gallon from flat, to even a few cents in the negative, in October.

The price for ethanol in the main Midwest production hub has shot higher as well, hitting about $2.40 a gallon from lows of $1.70 in October.

And strong oil prices have pulled up prices for gasoline which competes with ethanol. When gasoline prices rise, blenders and oil companies increase discretionary blending, or the mixing in of more ethanol into gasoline than is required by law. "That is directly spurring the recent rebound in ethanol," said Pavel Mulchanov, analyst at Raymond James in Houston.

(Reporting by Timothy Gardner, editing by Matthew Lewis)