LONDON Libyan oil trade has virtually been paralyzed as banks decline to clear payments in dollars due to U.S. sanctions, trading sources told Reuters on Tuesday.
The move follows a decision by major U.S. oil firms to halt trade with Libya and makes it almost impossible for European firms to buy Libyan oil and supply refineries in countries such as France and Italy.
Around half of Libya's oil output, or more than 1 percent of global supply, has already been choked off by lethal clashes between rebels and forces loyal to Libyan leader Muammar Gaddafi.
"Banks don't want to finance the system in Libya, so for the moment no one is getting money for oil. There are big problems for payments," said a senior trader with a European oil company.
Oil prices hit their highest since September 2008 on Monday
as cuts in Libyan exports piled pressure on OPEC to boost output. Goldman Sachs bank said OPEC's spare capacity to cushion lost output was much smaller than thought.
Sources at or close to major European buyers of Libyan crude, including Italy's Eni, ERG, Total and Saras, said the decision by banks to stop export financing of Libyan crude had virtually brought all transactions to a halt.
"It's not a matter of choice, there is an embargo on U.S. dollars coming in and out of Libya," said a trader with one of the firms, referring to banks' resistance to clear payments in the U.S. currency.
"All U.S. dollar transactions are being blocked," the trader said, adding it was not clear at this stage if payments were possible in other currencies and whether any Swiss or European banks were willing to conclude transactions.
Western countries, the European Union and United Nations have imposed sanctions on Libya and frozen government assets in response to forces loyal to Gaddafi firing on protesters.
"Sometimes it is easier not to trade at all than to trade with many caveats," said an oil trader working for a major international bank, adding EU's law interpretations could reopen some paths for trade in the long-term.
"If you can prove that money from oil purchased goes back to accounts not controlled by Gadaffi and family, perhaps you could argue that you are buying oil for humanitarian purposes and that the money would flow back into the country," he said.
Most estimates suggest around half of Libya's 1.6 million barrels per day (bpd) of oil production capacity has been suspended due to clashes between government forces and rebels.
"A virtually complete shut-in of Libyan crude production until the civil-war situation clarifies, or until peace is restored, is therefore now under way," said Samuel Ciszuk from IHS consultancy. "Fears over sanctions are doing their part to isolate the Libyan regime."
Some European countries such as France and Italy heavily rely on Libyan crude imports and will be looking for ways to restore supplies as quickly as possible.
"The loss of Libyan light-sweet crude poses a threat to the profitability of Europe's already troubled refining industry," JBC consultancy said in a note.
"This is due to the fact that refineries rely heavily on high quality crudes to produce value-added products and minimize expensive processing," it added.
However, Ciszuk said shippers may refrain from approaching Libyan oil ports because of fighting and will be in no hurry to return as long as insurers at the Lloyd's of London insurance market classify Libya as a high risk, or a war-zone destination.
"Insurance premiums play a significant role in the cost of crude shipping and escalated premiums for Libya mean that crude from other parts of the Middle East and North Africa, where sufficient capacity exists to replace Libyan output, instantly become more attractive," he said.
(Additional reporting by Zaida Espana in London and Muriel Boselli in Paris; writing by Dmitry Zhdannikov; editing by James Jukwey)