Oil settles at $32.30, up 21% from recent closing low

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U.S crude settled up more than 21 percent above a multi-year closing low hit last week as Russia said it was discussing the possibility of co-operation with OPEC, fanning hopes that a deal was in the works to reduce oversupply that sent prices the lowest levels in a dozen years.

Oil futures briefly pared gains, falling in tandem with stock markets after the Federal Reserve left interest rates unchanged on Wednesday, but recovered heading into U.S. crude's settle.

The Fed's policymaking committee said it was monitoring heightened market volatility, but noted that labor conditions are improving, asserted inflation will tick up, and reiterated its belief that the energy price plunge is "transitory."

Brent crude rose $1.34 to $33.14 a barrel by 2:36 p.m. ET, having hit a session high of $33.49.

U.S. crude futures settled up 85 cents at $32.30 a barrel, off a session peak of $32.84.

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Russia's energy ministry said possible coordination with the Organization of the Petroleum Exporting Countries (OPEC) was discussed at a meeting with Russian oil companies on Wednesday.

Top non-OPEC producer, Russia has in the past been unwilling to cut oil output, as it battles for market share with OPEC king-pin Saudi Arabia.

"I remain skeptical, at the end of the day, about that happening as the oil producers are looking at the other guy to cut production while maintaining their own levels," Andrew Lipow of Lipow Oil Associates said.

"I think the geopolitical factors in the Middle East are playing a bigger part in the actual oil production than the statements from energy ministers who'd like to see higher prices."

Hints of a possible deal between OPEC members and rival producers had already helped oil rally 4 percent on Tuesday.

Crude was looking firm before the Russia news on the back of a U.S. Energy Department report showing a surprise spike in demand for refined products like heating oil last week, when a massive blizzard hit the U.S. Northeast.

Heating oil futures rose 6 percent, boosted in part by forecasts for more cold weather later this week.

Data from the U.S. Energy Information Administration showed inventories of distillates such as heating oil fell by more than 4 million barrels, trumping expectations for a rise of nearly 2 million.

"The draw in distillate stocks is bullish, but we know there was cold weather in the United States in the last week, so I would say the reason behind the draw has something to do with the cold winter weather and, as such, the impact should be short-lived," Tamas Varga of PVM Oil Associates said.

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The data also showed U.S. crude oil stocks hit their highest on record in the latest week, due largely to increases on the U.S. Gulf Coast, a major oil hub.

The Energy Information Administration reported crude inventories rose by 8.4 million barrels in the week through Jan. 22, bringing the total in storage to 494.9 million barrels, the highest on record.

That inventory surge helped fuel the rally instead of fanning worries about excess supply, amid relief it fell short of an 11.5 million-barrel build reported by the American Petroleum Institute late Tuesday.

"I think we're in this mode where little things can set the market off into a reversal," Energy Management Institute analyst Dominick Chirichella said. "We're heading into a choppy trading period right now"

Oil prices have fallen nearly 16 percent in January, bringing total losses since the start of the decline in mid-2014 to 77 percent.

That said, oil bulls are gradually starting to emerge, with this month's drop below $30.

The options market shows traders are buying up protection against a rise to at least $40 by the end of the year, and speculators have increased their bullish bets on the price through the futures market.

Three U.S. shale oil companies have slashed their 2016 capital spending plans more than expected in a bid to survive the $30-a-barrel oil price.

Marco Dunand, the head of Mercuria, one of the world's biggest trading houses, said the market was close to rebalancing. Famed oil bull Andrew Hall, head of Astenbeck Commodities, said the market was ripe for a jump.

—CNBC's Tom DiChristopher contributed to this report.