Oil prices rose toward $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 15 cents higher at $68.20 a barrel by 1318 GMT, after earlier reaching a high of $69.39. London Brent crude was down 5 cents at $67.61 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 900,000 barrel draw.

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

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

The rally was extended as stocks in Europe rose after three days of losses. <.EU>

Analysts will be looking out for more signs that an economic recovery could be underway.

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 expected to leave output targets unchanged when it next meets on September 9 in Vienna.

(Editing by Keiron Henderson)