CHICAGO (Reuters) - Gasoline futures soared to a record premium over ethanol on Monday as gas prices topped $4 per gallon in some states while stocks of the biofuel were likely to continue swelling, analysts and traders said.

With retail gasoline in Chicago reportedly at a record high, April gasoline futures rose to $3.4175 per gallon at the New York Mercantile Exchange, just below the 10-month high set last week, as ideas of prolonged low interest rates propped up global oil prices.

Surging global energy prices amid sanctions against major oil producer Iran have underpinned gas prices even as they crimped fuel demand from drivers, with demand for gasoline in the United States over the past four weeks down nearly 8 percent from a year ago, according to the U.S. Energy Administration.

Graphic of gasoline-ethanol spread:
https://link.reuters.com/jar37s

Graphic of weekly ethanol production:
https://link.reuters.com/buq54s

The drop in demand for gas has helped push up ethanol stocks to a record high last week of 22.7 million barrels as the U.S. government mandates that each gallon of gasoline in the country can contain only 10 percent ethanol.

"Even though we have the incentive to blend, we can't blend much more -- we're up against the blend wall," said Jerrod Kitt, analyst at the Linn Group in Chicago.

April ethanol futures on Monday shed 1.7 cents to end at $2.275 per gallon at the Chicago Board of Trade, with futures also pressured by falling prices of its main feedstock corn, which declined 1.35 percent.

Gasoline's premium over ethanol hit $1.1475 per gallon during the session, the biggest premium since each contract was launched in 2005 and above the previous top $1.0970 per gallon set in 2008, the same year that saw oil prices hit record highs.

Many ethanol plants ramped up production at the end of 2011, ahead of the expiration of the Volumetric Ethanol Excise Tax Credit, or VEETC, a tax incentive that provided 45 cents per gallon to blenders who mixed ethanol with gasoline.

Ethanol stocks have remained high since the expiration of the credit, forcing some plants to reduce production or close.

Archer Daniels Midland shuttered a plant in North Dakota in February while Aventine Renewable Energy Holdings Inc earlier this month said it will temporarily shut down its Mount Vernon, Indiana, plant until margins are more attractive.

"We have seen some plants slow down in our direct area," said Chuck Woodside, chief executive officer at KAAPA Ethanol in Nebraska and chairman of the Renewable Fuels Association. "We're blending out everything to 10 percent. We need exports to balance out or gasoline to pick up."

Julie Ward, analyst at R.J. O'Brien, added: "We need to get into a driving season and we need to get the economy rolling, so we use more gas. There's not significantly more ethanol that we can blend, we're at the blend wall. We just need to work through the stocks."

(Reporting By Michael Hirtzer; Editing by David Gregorio)

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