UPDATE 2-Libyan oil trade paralysed, deals in dollars blocked

Tue Mar 8, 2011 5:50pm GMT

 * Most banks walk away from Libyan oil trade
 * Deals in dollars impossible, other currencies unclear
 * Shippers may refrain from approaching Libyan ports
 By Jessica Donati and Emma Farge
 (Adds analysts, quotes, details)
 LONDON, March 8 (Reuters) - Libyan oil trade has virtually
been paralysed 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 [ID:nLDE7261FX] 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. [ID:nLDE72701U]
 "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
[O/R] 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. [ID:nLDE7270S7]
 Sources at or close to major European buyers of Libyan
crude, including Italy's Eni (ENI.MI: Quote), ERG (ERG.MI: Quote), Total
(TOTF.PA: Quote) and Saras (SRS.MI: Quote), 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.
  FACTBOX on Libya's oil output and customers:  [ID:nLDE7260SL]
  FACTBOX on sanctions against Libya:           [ID:nLDE7211UI]
 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 minimise
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

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