By Amanda Cooper and Devika Krishna Kumar
NEW YORK/LONDON (Reuters) - Oil extended its gains and soared about 8 percent on Friday, as a cold snap boosted demand for heating oil, bringing with it a welcome break to the extremely bearish sentiment that had gripped oil markets this year.
The recovery stopped Brent oil prices heading towards a near 17-percent drop in January, the largest slide in the first month of the year in at least a quarter of a century.
"I think panic took over common sense and now we're starting to get a grip on reality," said Phil Flynn, analyst at Price Futures Group in Chicago.
A large driver of the rebound in prices over the last two days has also been short covering, the practice of buying back an asset sold previously at a higher price, as investors take advantage of the lowest prices since 2003 to close out some of their more profitable bets on price declines.
That and hopes for easier monetary policy from Europe have been catalysts to lift oil prices by 12 percent in just two days.
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"Given the volatility we've seen in the oil price, even intraday, swings of 3 to 4 percent, if you are going to see a rebound, this is the kind of rebound you'd expect," CMC Markets analyst Jasper Lawler said.
Brent rose $2.47, or 8.4 percent, to $31.72 a barrel, by 2:03 p.m. EST (1903 GMT), set for its biggest one-day rise since August.
Some analysts pointed to a largely similar rally in oil prices in late August, which was followed by eight weeks of choppy trading and ultimately a break to new lows.
"Markets seldom repeat themselves with precision, but we see potential for a variation on that theme now," Tim Evans, energy futures specialist at Citi Futures said.
U.S. crude rose $2.35 to $31.88 per barrel, an 8 percent gain.
Heating oil futures led the markets higher, with ICE gas oil futures
Freezing conditions and snowstorms have gripped parts of Europe and the United States, threatening to cripple a broad swath of the Northeast, the world's largest heating oil market, with about two feet (61 cm) of snow.
In the longer run, however, the cold snap may not be quite the boon oil bulls were hoping for.
Most in the industry maintained that the overwhelming bearishness of investors and oversupply woes persist.
"The big, big themes globally have not changed, but these are short-term positive developments," said Richard Hastings, macro strategist at Seaport Global Securities.
(Additional reporting by Scott DiSavino in New York, Amanda Cooper in London and Roslan Kwasawneh in Singapore; editing by Adrian Croft, David Clarke and Marguerita Choy)