* Short-covering helps 12 pct rebound over two days
* Brent still headed for steepest January loss in 25 years
* U.S. East Coast, continental Europe gripped by icy weather
(Adds details, quote; updates prices)
By Amanda Cooper and Devika Krishna Kumar
NEW YORK/LONDON, Jan 22 (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 toward 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.
"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 LCOc1 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 CLc1 rose $2.35 to $31.88 per barrel, an 8
percent gain.
Heating oil futures led the markets higher, with ICE gas oil
futures LGOc1 soaring more than 11 percent, their biggest
percentage gain since January 2009. U.S. heating oil HOc1 was
up more than 9 percent, its biggest one-day gain since September
2005.
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.
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