Oil traders are rushing to import ethanol from Brazil for the first time this year after U.S. regulators moved to increase use of advanced biofuel, opening a wide spread in the niche biofuel credits market.

The premium for Renewable Identification Number, or RIN, credits tied to "advanced" biofuels - such as Brazil's sugar-based supply - versus corn-based ethanol RINs, soared to its highest in over two years in the two weeks since the Environmental Protection Agency proposed higher-than-expected targets for use of fuels made from vegetable oil and plant waste.

As the spread trebled to 30 cents, importers, including Vitol SA and Morgan Stanley, moved to cash in on an opening arbitrage, scooping up as much as 40,000 cubic meters, or 10.6 million gallons, of Brazilian fuel ethanol in the last two weeks, U.S. market sources said. It was the biggest spate of buying so far this year, they said.

The trades work because "the spread blew out and opened up the arbitrage," said a U.S. merchant.

The reopening trade opportunity may help revive margins for big Brazilian producers such as Louis Dreyfus Commodities' Biosev and Copersucar, which are struggling with low cane prices.

It also represents more competition for domestic ethanol makers like Archer Daniels Midland Co and Poet LLC, which are already up in arms over reductions in government-mandated ethanol use targets and suffering from low prices due to swollen domestic inventories.

On May 29, the EPA issued long-awaited Renewable Fuel Standard (RFS) rules on the volume of ethanol and other biofuels that must be blended into the nation's fuel supply. RINs, which can be traded over-the-counter, are used to demonstrate compliance with the program.

Brazil's ethanol is made from sugarcane and qualifies for the advanced fuel credit because it more drastically cuts greenhouse gas emissions than its corn-based counterpart. Prices of advanced fuel RINs, known as D5, have held strong because the EPA proposed a bigger-than-expected mandate.

But prices for corn-based ethanol, known as D6, which represents the vast bulk of U.S. biofuels production, have plunged by a third due to constraints on distribution. The targets were below a 2007 plan laid out by Congress.

The gap between the two has widened to 30 cents from an average of around 10 cents, according to price assessments from Argus.

Companies that import Brazilian ethanol can collect the D5 RINs when they blend it with regular fuel, improving the economics of the trade.

Morgan Stanley and Vitol have purchased shipments of around 10,000-15,000 cubic meters each destined for Hawaii and Florida, respectively, according to market sources. A third energy company has also bought one shipment, one source said.

Shipments from Brazil were widely expected to increase as this season's harvest ramped up and as the real's depreciation against the U.S. dollar makes Brazilian exports more competitive.

The opportunities may increase next year, if the premium holds. The EPA proposed doubling the pool of any type of advanced fuel to more than 420 million gallons.

The EPA is required to set annual requirements for use of renewable fuels. Fuels like biodiesel, which is made of vegetable oils, and sugarcane ethanol are part of the advanced fuel pool.

"The size of the pool is a lot bigger," said Scott Irwin, an agricultural economist at the University of Illinois. "We could go from Brazilian imports approaching 250-400 million gallons, depending on which is less costly for fuel blenders."

That would be a more than seven-fold increase from 2014 levels. (Reporting by Chris Prentice)