Smoke and dust rise over Syrian town of Kobani after an airstrike, as seen from the Mursitpinar crossing on the Turkish-Syrian border in the southeastern town of Suruc Thomson Reuters

AMMAN (Reuters) - Islamic State is still extracting and selling oil in Syria and has adapted its trading techniques despite a month of strikes by U.S.-led forces aimed at cutting off this major source of income for the group, residents, oil executives and traders say.

While the raids by U.S. and Arab forces have targeted some small makeshift oil refineries run by locals in eastern areas controlled by Islamic State, they have avoided the wells the group controls.

This has limited the effectiveness of the campaign and means the militants are able to profit from crude sales of up to $2 million a day, according to oil workers in Syria, former oil executives and energy experts.

"They are in fact still selling the oil and even stepping up exploitation of new wells by tribal allies and taking advantage of the inability of the enemy to hit the oil fields," said Abdullah al-Jadaan, a tribal elder in Shuhail, a town in Syria's oil-producing Deir al-Zor province.

U.S.-led forces want to avoid hitting the oil installations hard because it could hurt civilians more than the militants and could radicalize the local population, analysts say.

On Thursday the United States threatened to impose sanctions on anyone buying oil from Islamic State militants in an effort to disrupt what it said was a $1-million-a-day funding source.

Most of the oil is bought by local traders and covers the domestic needs of rebel-held areas in northern Syria. But some low-quality crude has been smuggled to Turkey where prices of over $350 a barrel, three times the local rate, have nurtured a lucrative cross-border trade.

"Our options are limited unless you hit the wells - but it does not just hit Islamic State, it hits the entire population and that is not something that the U.S. can do very easily," said Andrew Tabler, a senior fellow at the U.S.-based Washington Institute, who focuses on Syria.

"It's a good example of the constraints of trying to bomb your way out of it."

Any bombing of Syria's major oil wells could evoke memories of the 1990-1991 Gulf War when the forces of Iraq's Saddam Hussein invaded Kuwait and burnt oil wells as they were repelled by U.S.-led forces, causing severe damage to the infrastructure.

Washington wants to preserve parts of Syria's oil infrastructure with the hope that they can be used after the war if Islamic State and the forces of President Bashar al-Assad are defeated, a U.S. official said near the start of the bombing campaign.

One U.S.-led raid destroyed parts of a mobile refinery in eastern Syria but left a tower at the installation intact.

"It wasn't about obliterating the refineries off the face of the map. It was about degrading (Islamic State's) ability to use these refineries," Pentagon press secretary Rear Admiral John Kirby told a briefing on Sept. 25.

"We'd like to preserve the flexibility for those refineries to still contribute to a stable economy in what we hope will be a stable country when the Assad regime is not in control anymore."

Over the summer Islamic State was pumping anything between 40,000 to 80,000 bpd of crude oil from the wells it controls in the Deir al-Zor and Hasaka provinces, according to estimates from oil experts, traders and local sources contacted by Reuters.

The International Energy Agency said in a report this month that output in Islamic State-controlled areas had fallen to less than 10,000 bpd as a result of the air strikes.

Local prices of petroleum products however suggest that the strikes have not had a large impact on the supply of illicit oil. A barrel of Islamic State oil sells for around $20, whereas early in 2014 it was selling for $35.

Traders say this is because there were ample stockpiles built up before the strikes and because Islamic State ramped up its production in recent weeks.

PRIVATE CONVOYS ON THE ROAD

Local businessmen have continued to send convoys of up to thirty trucks carrying oil from Islamic State-run wells through insurgent-held parts of Syria during broad daylight without being targeted by the air strikes. The militant group has allowed convoys to pass more quickly through its checkpoints.

It has encouraged customers to load up more than before and has offered discounts and deferred payments to shift more oil, two oil truck drivers and a local trader said.

The group's "oil department" has also told traders in the last two weeks they could load as much as they can and urged them to build stockpiles, something traders say suggests Islamic State thinks the oil wells could still be hit.

Others say that the threat of strikes has even pushed the militant Sunni Muslim group to use its oil wealth more effectively to shore up its local tribal support base.

The group is using its control of oil to strengthen ties with local tribes, rather than just hoarding profits as before, according to residents living in Islamic State-run areas.

It is now allowing some Bedouin tribes in the Deir al-Zor province to tap wells it controls, such as the Bar al Milh, al Kharata, Amra, Okash, Wadi Jureib, Safeeh, Fahda and many other medium and small disused wells in the Jebel Bushra area.

At least nine major tribes have benefited, including ones whose kin spread over the border into Iraq such as the influential Jabour tribe. The groups have largely been supportive of Islamic State.

Traders lured by high profits have continued to build stockpiles and to sell across Syria, even smuggling some into government-held areas.

"The American planes are above us day and night but we no longer care. They cannot be worse than Bashar's barrel bombs," said oil trader Ibrahim Fathallah, who sells low quality products to towns across the rebel-held northwestern Syria.

"We are the ones on the ground and know how to move across our land. They won't stop us for going on to earn a living for our families unless they bomb the hell out of us," he said.

A large trailer carrying 30,000 liters of Islamic State-supplied crude can make $4,000 profit in just one journey lasting a few days, traders say.

Traders say they can double returns by squeezing at least 20 barrels, worth around $400, on the back of a Kia pickup.

"Bombing or no bombing.. we will go there even if there is death because it brings a lot of revenue," said contractor Abdullah Sheikh who has used profits from his fleet of seven trailers to build mobile refineries in the northern town of Manbij.

CIVILIANS SUFFER

While some local businessmen have made large profits from the illicit oil trade, many other civilians have come to depend on the informal market which sprung up since the start of Syria's conflict more than three years ago.

It has been a major source of income for hundreds of thousands of families in rural areas of north and eastern Syria, where people have been displaced or lost jobs.

"The Americans know that these wells have opened an opportunity for many Syrians to benefit who have no links to militants," a Western diplomat familiar with U.S. strategy against Islamic State said.

The U.S-led strikes have knocked out dozens of‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬ privately-owned‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‮‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬‬ makeshift refineries that had mostly sprung up around Islamic State-controlled land along the border with Turkey. They were used as a hub for smuggling although traders say Turkey has clamped down on smugglers this year.

The plants were constructed by private businesses at a cost of $150,000 to $250,000 and processed 150-300 bpd of Islamic State-supplied crude oil.

Traders say the bombing of these larger refineries may have reduced processing capacity by 20-30 percent but was not having any major impact on the domestic fuel market so far.

Hundreds of smaller scale refineries are spread across swathes of insurgent-held land, making it difficult to hit them. They continue to refine the bulk of crude extracted, according to experts and traders.

The refineries included the one run by trader Mazen Mukhtar, who said his was destroyed by a U.S. Tomahawk missile this week in a direct hit, turning his family's life savings into a heap of mangled metal and burnt crude oil.

The mini refinery, that used primitive distillation and heating methods, cost him around $20,000 to build in a waste plot several kilometers away from his home. The Islamic State-run oil wells that supply it have been untouched.

"Why are they destroying our livelihood...do they want to throw our children to the street to start begging?" the 48-year-old said.

"Those who buy this fuel are only the poor who use it to make bread and cook their daily meals to feed their families. Why don't they go after the real terrorist Assad and his gang."

(Editing by Sylvia Westall and Anna Willard)