* 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, adds spare capacity)
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> fell 15 cents at $111.21 a
barrel by 1456 GMT, slipping 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 20 cents to $97.08, 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.
"Incremental production shut-ins that challenge available
spare capacity, should unrest spread, could lift prices
significantly," Morgan Stanley analyst Hussein Allidina said in
a research note.
Morgan Stanley estimates Saudi spare capacity near 4 million
bpd, accounting for most of OPEC's total spare capacity at just
below 5.3 million bpd.
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. []
Crude oil exports from Libyan ports and terminals mostly
halted, sources said. []
(Additional reporting from Randy Fabi in Singapore; Editing
by James Jukwey and Jane Baird)
