Oil gains 8 percent as cold snap forces bears to back off

By Amanda Cooper and Devika Krishna Kumar

LONDON/NEW YORK (Reuters) - Oil extended its gains and soared about 8 percent on Friday, as a cold snap boosted demand for heating oil and investors took advantage of the lowest prices since 2003 to close out some of their more profitable bets on price declines.

Short covering, the practice of buying back an asset sold previously at a higher price, and hopes for easier monetary policy from Europe have been catalysts to lift oil prices by 12 percent in just two days.

The rebound has stopped the oil price 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.

Money managers have racked up record-breaking bets against oil over the past few months. The price slide to its lowest since late 2003 this week provided a chance for them to book a profit on some of those positions, analysts said.

"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 $2.25, or 7.7 percent, to $31.50 a barrel by 11:47 a.m. EST (16:47 GMT), set for its biggest one-day rise since August. U.S. crude rose $2.04 to $31.57 per barrel.

Heating oil futures led the markets higher, with ICE gas oil futures soaring more than 10 percent, their biggest percentage gain since January 2009. U.S heating oil was up more than 8 percent, its biggest one-day gain since August.

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 heat oil market, with about 2 feet (61 cm) of snow.

In the longer run, however, the cold snap may not be quite the boon oil bulls were hoping for.

Still, some analysts were optimistic and believe oil prices may have finally hit a bottom, but maintained that the overwhelming bearishness of investors and oversupply woes persist.

"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.

"There's no doubt, there are fundamentals out there that mean weaker energy prices, but a price of $26 a barrel is pricing in a global recession and we're not in one"

(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)