US oil settles up $1.18, or 4.2%, at $29.53 a barrel

U.S. oil prices rebounded more than $1 a barrel from 12-year lows on Thursday, posting their biggest daily gain this year as rallying financial markets gave some bearish traders reason to take profits on record short positions.

U.S. crude briefly vaulted back to $30 as hopes for easier monetary policy from Europe fueled a recovery in European and U.S. stock markets. WTI futures settled up 4.16 percent, or $1.18, at $29.53 a barrel.

Prices did not falter on U.S. 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 20 percent slump, with oil under pressure from a deepening supply glut and signs of economic weakness in China.

"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 free-fall.

International benchmark Brent was up $1.42, or 5.1 percent, at $29.31 a barrel.

But Brent has lost more than 25 percent of its value 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 U.S. equity markets are going to be in the driver's seat over the near term."

Gains accelerated after the U.S. Energy Information Administration (EIA) reported that nationwide crude stocks rose by 4 million barrels, more than the forecast 2.8 million barrels. Still, traders were encouraged that stockpiles at the Cushing, Oklahoma, delivery hub rose by only 191,000 barrels, which was less than some had feared.

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

Indicating the glut may grow further, Iraq's Oil Minister Adel Abdul Mahdi told Reuters the country's southern region planned to increase output by up to 400,000 barrels per day (bpd) this year to over 4 million bpd.

Meanwhile, Venezuela has requested that OPEC hold an emergency meeting to discuss steps to prop up oil prices, although delegates from other members of the producer group said such a meeting was unlikely.

—CNBC's Tom DiChristopher contributed to this story.