Oil prices rose above $69 a barrel on Thursday, drawing support from a sharp fall in U.S. gasoline inventories that revived hopes of a demand recovery in the world's largest fuel consumer.

U.S. crude prices for October delivery were $1.02 higher at $69.07 a barrel by 1054 GMT (6:54 a.m. EDT), after earlier reaching a high of $69.39. London Brent crude rose 71 cents to $68.37 a barrel.

There are signs that demand is improving and stability is coming back into the economy, said Petromatrix analyst Olivier Jakob.

U.S. weekly government data on Wednesday showed that gasoline stocks fell by 3 million barrels, confounding analysts expectations for a mere 900,000 barrel draw.

This drop eclipsed news of a lower-than-expected drop in crude inventories as gasoline is taken as a more accurate gauge of U.S. demand.

The bullish stock news helped to tow prices up from a two-week low of $67.05 a barrel hit on Wednesday.

The rally was extended as stocks in Europe pushed higher in early trade after three days of losses. This followed a 4.8 percent rise in Chinese shares in a volatile session.

Analysts will be looking out for more signs that an economic recovery could be underway, with the weekly U.S. jobless claims data at 1230 GMT expected to provide further direction.

The number of U.S. workers claiming jobless benefits is expected to fall a further 10,000 below last week's four-month low to 560,000, a Reuters poll showed.

The Institute for Supply Management (ISM) will publish its August non-manufacturing index at 1400 GMT. Economists forecast a higher reading of 48.0 in July.

But even if Thursday's data is bullish for oil, the price is not likely to break out of the confines of its current range in the short-term, analysts said.

U.S. crude prices have been rangebound between $65-$75 a barrel since the start of August, fluctuating on the latest clues about the speed of an impending economic recovery.

There isn't the structural tightness for the market to break out of this range, said Jakob, pointing to brimming global distillates such as diesel stored on land and at sea.

Traders were also eyeing news that big oil producers are increasing output. Russian oil output hit a record high in August, nearing 10 million barrels per day as the country launched a new giant field.

OPEC is likely to leave output targets unchanged when it next meets on September 9 in Vienna.

(Editing by Peter Blackburn)