US ethanol producers bewildered analysts by cutting their output of the biofuel even as demand - and margins - rose, forcing blenders to turn to inventories to satisfy their appetites.

Production of ethanol, for which US plants use corn as the main feedstock, fell last week by 1.0% to 797,000 barrels a day, the US Energy Information Administration said.

The decline, for a second successive week, came despite improving margins which taken plants from a small loss, of perhaps 5 cents a gallon at the end of last month, to a profit of about 10 cents a gallon now, on estimates from Linn Group, the Chicago-based broker.

"And that profit is with all fixed costs thrown in," Linn Group analyst Jerrod Kitt said.

While Chicago corn futures have revived in the last week, they have gained less than 1% so far this month, on a May contract basis, compared with rise of nearly 6% in ethanol futures, implying signally better conditions for producers of the biofuel.

'Remarkably strong'

Ethanol prices have been supported by strong demand, up 2% on the week, from blenders who mix the biofuel into gasoline.

"That is remarkably strong, given the fact that refiners are running at only about 80% of crude oil capacity," in what is typically a weaker period for US consumption, compared with the summer driving season.

Blenders have instead been forced to turn to ethanol inventories, which tumbled by more than 660,000 barrels, or 3.4%, to 18.7m barrels, during a period during which stocks would typically be building ahead of the period of higher demand.

Inventories reached their highest on records going back to 2010 in the second week of March last year.

'Mystified'

Mr Kitt said that he was "mystified" by the drop in production, which followed reports of a series of ethanol plants reopening, after mothballing capacity last summer as corn prices set record highs.

"I am at a loss," he told Agrimoney.com.

"Ethanol plants do have spring breaks for maintenance. These are usually in April, but it may be they have taken them early."

Soaring market

The demand for ethanol reflects in part the soaring price of so-called Rins (renewable identification numbers) – paper credits blenders can use as alternatives for physical biofuel to meet mandated blending rates, and which are generated with every gallon produced.

The price of Rins has soared from historic rates of some $0.05 a gallon to a record high above $1.00 a gallon on Monday, on demand attributed to a shortfall in blending rates of physical ethanol behind mandated levels, forcing blenders to turn to the paper credits.

Rins, whose price tumbled in the last session, were on Wednesday trading at some 85-90 cents a gallon, up some 16 cents on the day, Mr Kitt said.

Rins outlook

He attributed the slump in prices in the last session to the end of short-covering pressure behind the jump in prices to Monday's record high.

"It does not necessarily mean the rally is over," he said.

Some forecasters see Rins only become more valuable, forecasting the shortfall in physical blending levels continuing to increase.

Rival broker US Commodities said that Tuesday's slump was down to rumours that US energy authorities were considering reducing the mandated levels for blending.