Updated from 2:30 p.m. EDT

Oil prices shot up Thursday, reversing Wednesday's loss, as traders once again eyed a potential heating oil shortage as a reason to buy crude.

July crude closed up $1.74 at $54.28 a barrel on Nymex. Gasoline futures rallied 8 cents to $1.57 a gallon.

The Energy Department said Wednesday that U.S. crude inventories fell by 3.1 million barrels last week, and gasoline inventories fell by 31,000 barrels. Prices, nevertheless, plunged more than $1 as it became evident that lower imports, not increased demand, was the primary reason for the reduction.

Distillate inventories rose a surprising 1.3 million barrels in the report, although heating oil levels were flat relative to the previous week. The report also reiterated that distillates are still at the lower end of the average range for this time of year.

Demand for distillate fuels -- including jet fuel, heating oil and diesel -- grew by 6.6% from the same time last year, while gasoline demand is up 2.4% from the same time a year ago.

"Heating oil is trading at a pretty significant premium over gasoline," says Bill O'Grady, assistant director of market analysis at A.G. Edwards. "It is a very rare spread for this time of year. Usually heating oil trades 7 cents under gasoline; it is now 10 cents over it."

O'Grady says refiners have started skewing toward distillate production and expects more aggressive production to address a "stunningly high demand for distillates."

Heating oil surged by 7 cents, or 4.7%, to $1.625.

OPEC's president, Sheikh Ahmad Fahd al-Sabah, also Kuwait's oil minister, said Thursday that the organization may raise its production quota by 500,000 barrels in order to contain rising prices when it meets on June 15,

Bloomberg

reported. "My proposal as the president is to raise the ceiling by another 500,000 barrels a day,'' al-Sabah said. "It will give the market a positive signal to stabilize prices and show there is a serious willingness from OPEC to secure supply for the third and fourth quarters.''

If the oil cartel goes through with the proposed increase, its formal production will reach 28 million barrels a day, although it has already been pumping more than the official numbers -- about 30 million barrels a day.

Among oil companies, shares of

CNOOC

(CEO) - Get Report

, China's national oil company, fell after being reduced to neutral from buy by Merrill Lynch analyst Mario Traviati, who said CNOOC's Monday announcement of its renewed interest in bidding for

Unocal

(UCL)

"does not make sense."

"This would be a very large bid for CNOOC Ltd, and Unocal has a substantial U.S. asset base that we do not regard as a good fit. Any bid could not come at a worse time given high oil prices and the state of Sino-U.S. relations," Traviati said.

The independent gas and oil producer

Berry Petroleum

(BRY) - Get Report

said it will buy back $50 million of its shares. "We believe our shares provide an excellent investment opportunity as we have delivered ... a five-year average return on equity of 22%," Robert Heinemann, president and chief CEO said in a statement. Shares jumped $1.55, or 3.2%, to $50.78.

The Philadelphia Oil Service Sector Index was recently up 3.45% led by a 4.2% increase in

GlobalSantaFe

(GSF)

shares. The oil and gas drilling company said Wednesday that it doubled its quarterly paid dividend to 15 cents from 7.5 cents due to it "financial strength and increasing liquidity," GlobalSantaFe said in a statement.

The index is also propped up by increases at

Noble

(NE) - Get Report

, which rose 3.45% to $60.88, and

Weatherford

(WFT) - Get Report

, with a 3.65% gain to $57.67.

Shares of most major oil producers surged in late day trading, pushing up the Amex Oil Index by 2.4%.

Exxon Mobil

(XOM) - Get Report

rose 2.57%;

Chevron

(CVX) - Get Report

gained 2%;

ConocoPhillips

(COP) - Get Report

climbed 2.55%;

Royal Dutch/Shell

(RD)

gained 1.15%; and

BP

(BP) - Get Report

increased 1.72%.