Oil prices surged 5% on Tuesday, the biggest daily gain since April, as investors' covering of short positions and a technical rebound helped lift the market from two-month lows.

However, crude futures pared gains in post-settlement trade after industry group American Petroleum Institute (API) reported a surprise build of 2.2 million barrels in U.S. crude stockpiles last week. 

U.S. crude's West Texas Intermediate (WTI) futures settled up $2.04, or 4.6 %, at $46.80 a barrel. Brent crude futures settled up $2.22, or 4.8 %, at $48.47. 

Oil came under selling pressure after the last EIA weekly report contained U.S. crude and gasoline inventory numbers that signaled weak demand. A higher count for U.S. oil drilling rigs and fewer bullish bets by hedge funds had also weighed on the market.

In Tuesday's early trade, oil was supported by producer group OPEC's optimism that the market was likely to achieve balance in supply-demand by next year. Also aiding sentiment was a separate EIA report showing higher estimates for U.S. oil demand growth in 2017.

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