* Saudi Arabia ups output by about 700,000 bpd
* Crude oil buyers cite quality issues
* Key Libyan oil terminals in Libya held by rebels
(Updates prices)
By Ikuko Kurahone and Nia Williams
LONDON, Feb 25 (Reuters) - Oil retreated on Friday as a
senior industry official said top exporter Saudi Arabia had
increased output to make up for any shortages as a result of a
disruption to oil supplies from Libya.
ICE Brent crude futures <LCOc1> were up 2 cents at $111.38 a
barrel by 1344 GMT, retreating from $113.91 earlier in the day.
They touched a two-and-half year high of $119.79 on Thursday.
U.S. crude futures <CLc1> fell 48 cents to $96.80, off from
$99.20 earlier in the day. They hit $103.41 on Thursday, the
highest since September 2008.
Credit Agricole CIB global analyst Christophe Barret said
the initial panic in the oil market was receding.
"Yesterday we had a very large shock; it was the first time
we had real disruption to supply and real disruption to exports.
But this can be absorbed by regular market functioning, which is
what is happening right now," Barret said.
"At the end of the chain you will have OPEC increasing
production, but it's not economical for Italy to ask Saudi
Arabia directly for more oil."
Saudi Arabia has quietly increased its production to more
than 9 million barrels per day (bpd), an increase of more than
700,000 bpd, a senior industry source familiar with Saudi
production told Reuters on Friday.
"We have started producing over 9 million barrels per day.
We have a lot of production capacity," the source said.
Reuters estimated Saudi output at 8.3 million bpd in
January. OPEC's leading producer has come under pressure to lift
output to stem the spike in prices.
In terms of the volume, the increase could compensate for at
least a part of the loss of Libyan supply due to civil unrest in
the North African country.
The estimates of Libya's shut-in volume varies. The
International Energy Agency said Libyan oil output had been cut
by 500,000 to 750,000 bpd due to the unrest, while Italian oil
company ENI <ENI.MI> said as much as 1.2 million bpd might be
down. []
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Graphic on Brent backwardation:
http://graphics.thomsonreuters.com/AS/0810/NT_112502141533.jpg
Unrest in Mideast, N. Africa: []
Analysis on impact on Libyan oil sector: []
Interactive factbox http://link.reuters.com/puk87r
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DIFFERENT OIL GRADES
Libya is an OPEC producer with normal output of 1.6 million
barrels per day. Saudi Arabia is the only oil producer with
significant spare capacity to meet global supply outage volume
such as the reduction in the flow from Libya.
Still analysts and traders said the outage would lend
support to oil prices.
Some industry officials and physical oil traders said the
difference in qualities between Saudi and Libyan oils may make
it difficult to fill in the supply gap immediately.
Italian refiner Saras <SRS.MI> said it would look to
alternative crude from other countries.
"Saudi Arabia is not an alternative to Libya since its crude
is not sweet," Saras General Manager Dario Scaffardi told
Reuters on Friday. Sweet crude is oil with low sulphur content.
Key Libyan crude and oil product terminals east of the
capital are in the hands of rebels, who have seized control from
leader Muammar Gaddafi. []
The unrest in Libya followed massive protests in Tunisia and
Egypt, which led to the toppling of their long-time leaders, and
has spread to other Middle East Gulf nations.
"While Tunisia and Egypt hold little relevance for the
global oil market, Libya is a different kettle of fish. It is by
no means the biggest oil producer in the world ... but it still
accounts for around 2 percent of total output," an economist
with HSBC said in a research note.
"If the Libyan oil taps were turned off -- and, in the event
of a destructive civil war, remained off for the foreseeable
future - either oil output would need to come from somewhere
else, or instead oil prices would have to rise."
(Additional reporting from Randy Fabi in Singapore; Editing by
James Jukwey and Jane Baird)
