Wall Street bank Morgan Stanley has stopped trading oil with Libya, a trade source said on Monday, in an early indication that U.S. sanctions could further hit exports from the north African producer.

Morgan Stanley canceled all crude oil and refined product deals in the past week due to the OFAC, the source familiar with the firm's transactions said, referring to the U.S. Office of Foreign Assets Control which controls trade sanctions.

Morgan Stanley declined to comment.

Around half of Libya's oil output has already been choked off by lethal clashes between rebels and forces loyal to Libyan leader Muammar Gaddafi.

Traders now say that shipments from Africa's third-largest producer will drop further because of international sanctions from Western countries, including the United States.

A second trade source working for a U.S. oil company said: The normal lifters out of Libya will have to reassess whether they can take the crude.

France's Total, ConocoPhillips and Italian oil firms ENI and Saras have in the past been regular buyers of Libyan crude oil.

Morgan Stanley regularly sourced between 2-3 cargoes of oil from Libya per month to feed the UK Grangemouth and the French Lavera refineries, an oil trader said.

This amounts to around 2 million barrels of oil worth around $234 million based on a Brent price of $117 a barrel.

The bank also traded gasoline with Libya, sources said.

Olivier Jakob, consultant at Petromatrix said: It's not worth seeing your name in the paper associated with Libyan deals. Some companies buying from Libya will balance the reputational risk against what this trade will bring them.

FALLING OUTPUT

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.

Some trade sources expect other oil companies to follow Morgan Stanley's lead and stop oil trade with Libya, effectively halting exports to the international market.

Players won't be able to buy Libyan crude even if it's there. It won't matter if they are producing or not, said a crude oil trader.

A trader working for an oil major said that U.S. citizens dealing oil are now forbidden from dealing with Libya and expected others to follow suit.

But some traders said that even if some companies forfeit their Libyan oil contracts, other companies less concerned about their public image will quickly fill this role in a tightly supplied market.

The oil produced will go somewhere. Someone will take it, said the oil trader working for a U.S. company.

Austrian energy group OMV, which has production operations Libya, said on Monday it was still getting oil from Libya despite severe output disruptions.

The other major constraint is port blockages which could further slow exports.

(Reporting by Emma Farge; Additional reporting by Dmitry Zhdannikov; editing by Jason Neely)

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