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Oil rebounds from 12-year low as equities rally, shorts cover

[NEW YORK] Oil prices rebounded over US$1 a barrel from 12-year lows on Thursday, their biggest daily gain this year, as rallying financial markets gave some bearish traders reason to take profits on record short positions.

US crude vaulted back toward US$30 per barrel as hopes for easier monetary policy from Europe fueled a recovery in stock markets in European and on Wall Street.

Prices did not falter on US data showing a larger-than-expected rise in record high crude and gasoline stockpiles. Instead, the report triggered buying among traders who had feared the figures could be even worse.

Still, few traders expected a quick recovery from this year's slump of more than 25 per cent, amid pressure from a deepening supply glut and signs of economic weakness in China - the world's No 2 oil consumer. "The fundamentals are still weak and you still have worries about economic growth and its impact on fuel demand, so this is probably a sign that things have been overdone more than anything else," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

He said the market was going to be vulnerable to small turnarounds, given this year's freefall.

Benchmark Brent futures for March delivery rose US$1.37 to settle at US$29.25 a barrel, a 4.9 per cent gain. US crude rose US$1.18 to settle 4.2 per cent higher at US$29.53 per barrel.

Brent rose as much as 7 per cent during the session to US$29.84, while WTI rose as much as 6.7 per cent to US$30.25.

Yet, Brent has lost more than 25 per cent of its value so far in January and is on track for its biggest monthly fall since 2008.

Thursday's rally got going after European Central Bank President Mario Draghi said it would be necessary to review the Bank's monetary policy stance in March, fueling hopes for more quantitative easing. "The market, especially the equity markets, want stimulus and need stimulus in order to keep the rally going," said Brian LaRose, a technical analyst with United-ICAP. "It's all about economic expectations here and the US equity markets are going to be in the driver's seat over the near term." Gains accelerated after the US Energy Information Administration (EIA) reported that nationwide crude stocks rose by 4 million barrels, more than the forecast 2.8 million barrels. But traders were still encouraged that stockpiles at the Cushing, Oklahoma, delivery hub rose by only 191,000 barrels, less than some had feared.

In one of the few bullish spots, distillate fuel inventories fell by 1 million barrels, the EIA said.

Iran's return to the oil market this month has added to worries, after the lifting of international sanctions.