LONDON (Reuters) - Libyan oil trade has 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 will complicate deals for European firms to buy Libyan oil.
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. Oil prices hit their highest levels since September 2008 on Monday.
"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.
Sources at or close to major European buyers of Libyan crude, including Italy's Eni, ERG 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.
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 longer-term EU law interpretations could reopen some paths for trade.
"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.
(Reporting by Jessica Donati, Emma Farge and Zaida Espana, writing by Dmitry Zhdannikov; editing by James Jukwey)