Around half of Libya's oil output, or over 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.

Exxon Mobil and Morgan Stanley have stopped trading oil with Libya, trade sources said on Monday. ConocoPhillips also said it was not exporting oil from the country.

"We are in full compliance with U.S. sanctions", a Conoco spokesman said.

Trading sources said the biggest European buyers of Libyan oil, including Italian refiners, continued to trade. But trade finance was becoming a problem, similar to big banks' reluctance to finance oil deals with Iran because of U.S. sanctions.

"Banks are blocking payments. You can't find one willing to make the transactions. The cargoes that are being delivered haven't been paid for," said a trader with a European firm.

"There are fewer and fewer cargoes leaving Libya; production keeps dropping. Each tanker that is delivered could well be the last," he added.

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

France's Total and Italian companies ENI and Saras were regular buyers of Libyan crude oil in the past.

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 U.S. firms' lead and stop 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 a non-U.S. oil major said that U.S. citizens were now forbidden from dealing with Libyan oil.

"Sanctions and legal restrictions recently imposed on Libya could complicate a return to normal trade and commerce," said Michael Wittner from Societe Generale.

"Will the shut-in volumes go higher? The answer is Yes. As the conflict drags on, it is entirely possible, and maybe even probable, that Libyan oil production and exports will drop all the way to zero," he added.

Morgan Stanley regularly sourced two to three 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.

Conoco has a non-operating 16 percent interest in the Waha concessions in Libya. Net oil production averaged 46,000 barrels per day in 2010, versus 45,000 barrels per day in 2009.

Exxon was buying substantial volumes of Libyan crude, sources said.

Some traders said that even if some companies forfeit their Libyan oil contracts, other firms may 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 in Libya, said on Monday it was still getting oil from the country despite severe output disruptions.

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