Updated from 2:09 p.m. EDT

Oil prices rebounded Wednesday despite a government report showing brisk growth in crude inventories, as traders bought at the lowest prices in two months.

According to the Energy Department, U.S. crude stocks rose by 2.6 million barrels last week, about twice the expected rate and the 12th gain in 13 weeks. Gasoline inventories added 2.2 million barrels, three times analysts' consensus forecast.

Oil prices plunged in the immediate aftermath of the report, touching a session low of $48.80 a barrel on the June contract. But prices bounced from there, and settled at $50.13 on Nymex, up 63 cents from Tuesday. Gasoline prices closed up 1 cent at $1.467 a gallon.

"What we saw today was not an upward trend but a short-covering rally," John Kidluff, senior vice president of energy risk management at Fimat USA, said. "Hedge funds and value buyer were looking to cover their short positions so we had a fair amount of buying."

"There is plenty of oil in the market, seen by inventory levels way above our expectations," said Stephen Burns, Houston Bureau Chief at Argus Media, which provides energy market analysis and information.

Burns says that with imports of 10 million barrels a day and Saudi Arabia "happy to see continuing builds in inventories," oil prices should continue to feel downward pressure.

The inventory numbers also helped ease concerns about constricting petroleum supplies that have sent the price of gas at the retail pump up to about $2.20 nationwide. Gasoline production has hit bottlenecks in the U.S., with most of the nation's refiners running out of spare capacity.

As of last week, U.S. refinery utilization stood at 91.7%, up from 91.3% a week earlier. "This is still below the output needed to make a dent in the crude stockpile," Burns said. Analysts are expecting an incremental increase in refinery output as the peak driving season approaches and as demand for blended gasoline products increases. "When refineries step up their production ahead of the summer driving season, we will see more draws on crude inventories," he said.

President Bush proposed last week the use of abandoned military bases to build new refineries. No new refinery has been built in the U.S. since the 1970s.

Recently, however, the Environmental Protection Agency approved an application for an air permit related to the construction of a new refinery in Arizona by Arizona Clean Fuels, a private refining company which produces environmentally friendly, clean burning fuel. The project, which still has a ways to go before getting all the necessary approvals, is estimated to cost $2.5 billion.

Elsewhere, Russia continues to disappoint companies hoping to tap into its natural gas and oilfields. Last week,

BP's

(BP) - Get Report

TNK-BP subsidiary was slapped with a $1 billion tax bill by the Russian government. Today, French oil and gas giant

Total S.A.

(TOT) - Get Report

, which is trying to buy 25% of Russian gas producer Novatek, expressed doubts that its deal would go through.

Losing the deal would be a significant negative for the company. Total's CFO, Robert Castaigne, said Wednesday that the company's production targets would be reduced without Novatek, with average annual growth in gas and oil output of 3% or 4% through 2010. The company had previously estimated growth of 4% with the Novatek acquisition.

In company earnings,

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Spinnaker Exploration

(SKE)

said first quarter revenue increased by 31%. Net income, excluding a $7.7 million writedown, was $16.3 million, or 47 cents a share, up from $13.7 million, or 40 cents a share, a year ago. Analysts were forecasting 42 cents a share in the latest quarter, according to Thomson Financial. The company said earnings were driven by a 109% increase in oil production to 693,000 barrels and by a 34% increase in oil prices to $46.76 a barrel. Share rose by 0.98% to $32.81.

The Philadelphia Oil Service Sector Index rallied about 2% after the government inventory report was released, led higher by

BJ Services

(BJS)

, with a 2.6% gain, and

Nabors Industries

(NBR) - Get Report

, which rose more than 2%.

Shares of major oil producers were mixed.

Exxon Mobil

(XOM) - Get Report

gained 0.78%;

ChevronTexaco

(CVX) - Get Report

rose 0.80%;

Royal Dutch/Shell

(RD)

gained 1.13%; and BP rose 1.56%.