(Upates to late afternoon; adds commentary; changes byline)
* Rise in oil to 3-year high lifts energy stocks
* Airline stocks rise after Delta's upbeat forecast
* Cheaper services weigh on producer prices; jobless claims up
* Indexes up: Dow 0.54 pct, S&P 500 0.5 pct, Nasdaq 0.6 pct
Jan 11 (Reuters) - Wall Street surged to record highs on Thursday as rising oil prices lifted energy stocks and investors bet on a strong U.S. corporate earnings season.
The S&P energy sector jumped more than 2 percent as Brent crude rose above $70 a barrel for the first time since December 2014, boosted by a surprise drop in U.S. production and lower crude inventories.
The industrial index was helped by airlines after an upbeat forecast from No. 2 U.S. carrier Delta Air Lines.
"The unifying factor of today's move and this whole week is a heightened confidence in the pace of economic activity. That helps explain the demand picture which has oil up at $70," said Scott Clemons, chief investment strategist at Brown Brothers Harriman, in New York.
At 2:51 p.m., the Dow Jones Industrial Average rose 138.1 points, or 0.54 percent, to 25,507.23, the S&P 500 gained 13.76 points, or 0.5 percent, to 2,761.99, and the Nasdaq Composite added 43.16 points, or 0.6 percent, to 7,196.73.
Wall Street had dropped on Wednesday, the first daily declines in 2018 following a report that China would slow U.S. government bond purchases and a report that U.S. President Donald Trump would end a key trade agreement.
Investors were expecting bullish quarterly earnings reports from the biggest U.S. companies and were hoping for some details on expected savings from the new federal tax code. The reporting season kicks off in earnest on Friday, with results from the big U.S. banks JPMorgan Chase & Co and Wells Fargo & Co .
Earnings for S&P 500 companies are expected to have increased by 11.8 percent in the recently ended quarter, with the biggest gain from the energy sector, according to Thomson Reuters I/B/E/S.
"This market feels this week like a deep breath before the onslaught of earnings reports," Clemons said. "This is a wait-and-see mode with a healthy amount of optimism."
Delta Air Lines shares rose as much as 5.96 percent after the company predicted a double benefit from the U.S. corporate tax cut - savings on its own bill and an uptick in business travel as it expects companies to spend tax savings. It also reported an upbeat quarterly profit.
Delta helped the Dow Jones U.S. Airlines index rise about 5 percent. The Dow Jones Transport index was up 2.3 percent, on track for its biggest one-day percentage gain since Nov. 29.
"You see this continued rotation into stocks that will accelerate with the economy," said Michael Antonelli, managing director of institutional sales trading at Robert W. Baird in Milwaukee.
Xerox shares jumped about 5 percent after the Wall Street Journal reported the copier maker was in deal talks with Japanese camera maker Fujifilm Holdings that could include a change in control of Xerox.
Investors shrugged off data that showed U.S. producer prices fell for the first time in nearly 1-1/2 years in December and weekly jobless claims increased for a fourth straight week to a more than three-month high.
Advancing issues outnumbered declining ones on the NYSE by a 3.28-to-1 ratio; on Nasdaq, a 3.06-to-1 ratio favored advancers.
The S&P 500 posted 90 new 52-week highs and seven new lows; the Nasdaq Composite recorded 154 new highs and 16 new lows. (Additional reporting by Sruthi Shankar in Bengaluru; Editing by Leslie Adler)