By Devika Krishna Kumar
NEW YORK (Reuters) - Oil prices surged on Tuesday, settling more than 4 percent higher as investors found reasons to hope for output cuts that could eventually reduce one of the biggest global supply gluts in decades.
Crude jumped after OPEC renewed calls for rival producers to cut supply alongside its members. More buying emerged after U.S.-based global oil producer Hess Corp (N:HES) said it planned to cut capital spending by 40 percent this year. After settlement, other U.S. producers announced spending cuts.
Brent crude settled up $1.30, or 4.26 percent, at $31.80 a barrel, rebounding from a decline at the start of the session to top out at $32.72.
U.S. crude rose 3.7 percent, or $1.11, to settle at $31.45 a barrel. During the session it rose as high as $32.41.
The contract briefly turned negative in post-settlement trade after data from the American Petroleum Institute, an industry group, showed a larger-than-expected inventory build in U.S. crude stocks in the week to Jan. 22.
Still, Crude stocks at the Cushing, Oklahoma, delivery hub fell by 664,000 barrels, API said.
Some analysts had expected a fall in the inventory at the delivery hub as Canadian oil sands producers start to cut output.
U.S. government data on U.S. crude oil stocks is due on Wednesday.
Saudi Arabia, kingpin of the Organization of the Petroleum Exporting Countries, and top non-OPEC producer Russia are showing signs of flexibility about agreeing to tackle the global oil glut, the oil minister of Iraq said.
Worries about the Chinese economy limited crude's gains. The country is the world's second largest oil consumer.
Last Wednesday Brent hit its lowest price since November 2003 at $27.10, before rebounding 15 percent on Thursday and Friday.
Tim Evans, energy futures specialist at Citi Futures wrote in a note that "it remains uncertain whether Saudi Arabia and its allies within OPEC are ready to return to the bargaining table" to negotiate cuts in crude output.
"Without Saudi Arabia on board, there's simply no deal and the market will be left to rebalance naturally as non-OPEC output declines, a slow and still painful process"
Even with oil's near 20-percent drop to 12-year lows, major OPEC producers have not reduced production. Some, like Iraq, plan to boost supply.
OPEC's Gulf members have insisted OPEC will not cut production alone, which would cede market share to rivals.
David Hufton of oil brokers PVM reckons an agreement could put oil back in a range of $40 to $60 per barrel.
Following the Hess announcement of spending cuts, traders said they expected similar steps from other U.S. producers.
"I think you're going to see more capital spending cuts - it usually happens when prices start to bottom out," said Phil Flynn, analyst at the Price Futures Group brokerage in Chicago
"It's significant that the market is now reacting positively to positive news, which means some of the fear is now starting to subside."
After crude settled, North Dakota's No. 2 crude producer Continental Resources Inc said it would slash its 2016 capital budget by 66 percent. Noble Energy Inc (N:NBL) also said it will cut spending about 50 percent this year. Traders also watched the dollar as U.S. Federal Reserve policy makers opened a two day meeting on Tuesday.
The strength of the dollar has made oil more expensive for buyers in other currencies.
If the Fed acknowledges that global markets are weak, it could reassure oil traders "that they can find a bottom" Flynn said. "The pieces are in place for at least a temporary bottom in oil"
(Additonal reporting by Alex Lawler in London and Meeyoung Cho in Seoul; editing by David Gregorio and Alden Bentley)