Updated from 11:05 a.m. EDT

Oil prices moved higher Thursday as traders focused on rising crude demand in China and a larger-than-expected drop in crude stockpiles.

Light, sweet crude for July delivery gained 36 cents to settle at $69.50 a barrel. Wholesale gasoline and heating oil each traded 1 cent higher, at $2.03 a gallon and $1.93 a gallon, respectively.

Energy shares followed crude higher in a big stock market rally, with natural gas and oil producers ands service companies up 3% to 6%.

Last month, industrial production in China expanded by 17.9% -- the largest increase in two years -- and oil imports jumped 19%, according to government data. After the U.S., China is the world's largest consumer of crude. During the second quarter, Chinese oil consumption is expected to grow by 8.6%.

According to Energy Department data released Wednesday, U.S. refiners ramped up production of gasoline for the peak summer driving season last week and drove down crude supplies by 900,000 barrels to 345.7 million barrels. Refineries operated at their busiest pace since hurricanes shut down most of the Gulf of Mexico's oil industry last fall, at 92.7% capacity.

Crude is refined into petroleum products like gasoline and heating oil.

Inventories of gasoline surged by 2.8 million barrels -- double the amount analysts had expected. Supplies have risen for seven weeks straight, and prices have fallen 13 cents in that period. Stockpiles should fall, though, beginning in June as millions of Americans take summer road trips.

However, geopolitical problems, which have underpinned energy prices this year, could quickly worsen and drive crude higher. A standoff with Iran over its nuclear program, rebel attacks on Nigeria's oil installations and a nationalization campaign in Venezuela have all been bullish for oil, as has lower production in the Gulf of Mexico.

Earlier this month, the U.N. Security Council presented Iran with an incentives package designed to convince the world's fourth-largest crude producer to halt uranium enrichment. The proposal includes trade incentives and an offer to build a light-water reactor. Iran has yet to respond formally to the package, though Iranian officials have called it positive while insisting they have a right to nuclear technology.

Oil prices are up 14% this year largely due to political events and supply glitches around the world. Traders have been fretting energy prices would lead to inflation and another

Federal Reserve

rate hike later this month. For traders, rate hikes mean slower economic growth and lower crude demand.

The U.S. economy has thus far shown "underlying strength and resiliency" but could slow if oil prices remain high,

Federal Reserve

Chairman Ben Bernanke said at a meeting of the Economic Club of Chicago Thursday.

"A significant increase in energy prices can simultaneously slow economic growth while raising inflation," said Bernanke, according to

Bloomberg

.

Already, surging energy prices have boosted domestic consumer and producer prices in government reports released this week. Those increases have the Federal Reserve concerned because they want to stave off inflation but not harm the economy. Thus far, the bank has raised rates 16 times and may raise them by another quarter percentage point to 5.25%.

Warm weather predictions and prospects of another active hurricane season propped up natural gas prices, which skyrocketed 62 cents to a seven-week high of $7.21 per million British thermal units. The increase comes in the face of a glut in supplies and another rise in inventories in the Energy Department's weekly fuel update released on Thursday.

Last week, inventories jumped by 77 billion cubic feet to 2.3 trillion cubic feet. In a

Bloomberg

poll of analysts, inventories were estimated to climb by 86 billion cubic feet. Supplies are now 23% above last year and 38% above the five-year average.

Natural gas producers followed fuel prices higher, rising over 2% on the Amex Natural Gas Index.

Southwestern Energy

(SWN) - Get Report

,

Anadarko Petroleum

(APC) - Get Report

, and

Devon Energy

(DVN) - Get Report

were leading the advances on the index, rising nearly 5%.

The leaders on the Amex Oil Index included

Valero Energy

(VLO) - Get Report

,

Hess

(HES) - Get Report

,

ConocoPhillips

(COP) - Get Report

, and

Total

(TOT) - Get Report

.

Among oil service companies,

Weatherford International

(WFT) - Get Report

,

Tidewater

(TDW) - Get Report

, and

Noble

(NE) - Get Report

were leading the Philadelphia Oil Service Index, up 5% to 6% each.