* Fire at Copersucar facility causes latest spike in prices
* Three years of oversupply may be reaching an end
* Speculators have built up long position-traders
* Stronger than expected Chinese, Indonesian demand for sugar
LONDON, Oct 21 (Reuters) - Images of warehouses full of Brazilian sugar going up in smoke have drawn attention to a price hike in a commodity already finding new favour with investors as years of oversupply look like coming to an end.
Sugar prices have rallied by more than 25 percent since July and spiked 6 percent on Friday, to a one-year high, after fire swept through a terminal owned by Copersucar at the Santos port in Brazil, the world's top producer and exporter.
Until recently they had been held down by oversupply resulting from producers' efforts to cash in on 30-year highs hit in 2011 and the strength of the dollar, which has depressed commodities priced in the U.S. currency.
A surplus of 4.5 million tonnes is forecast for 2013/14, data from the International Sugar Organization (ISO) showed, after 10.2 million tonnes 2012/13 and 6.1 million tonnes the previous year.
The ISO, which tracks global demand and supply, has not yet released a projection for 2014/15, but Sergey Gudoshnikov, a senior economist of the inter-governmental organisation, said he expected it to be finely balanced or to show a small surplus.
Sugar prices could rise further on weather risks, if it continues to rain heavily in Brazil and Europe, hampering harvesting, or if wet weather complicates Asian harvests in key producers later this year, such as India and Thailand.
"The weather risk is the most important factor that could determine any future upside in sugar prices," Gudoshnikov said.
Managed investment funds have generally held short positions during the last couple of years to profit from a decline of more than 50 percent in ICE raw sugar futures driven by excess global supplies.
They hit a 3-year low of 15.93 cents a lb in July but closed at 19.50 cents a lb on Friday after the fire, although Copersucar's rivals are likely to pick up some of the slack.
Outside of short-term drivers, buoyant demand in China and Southeast Asia, along with weather concerns from top grower Brazil, are forcing investors off the sidelines.
"Funds have gone net long because of concerns that the rains in Brazil would hurt the crop and an increased allocation by mills to ethanol instead of sugar, could decrease sugar stocks," said Romain Lathiere, a fund manager with Diapason Commodities Management.
Sugar competes with biofuel ethanol for available supplies of sugarcane in Brazil and any alteration of the allocation due to the wet weather could have a dramatic impact.
While the U.S. government shutdown has limited positioning data from the Commodities Futures Trading Commission (CFTC), dealers talked of speculators holding a net long position of a total of 135,000 to 160,000 lots, or roughly up to 8 million tonnes between them.
"I think most of the funds trading sugar now are technical or black box funds that respond to their own systems," said Jonathan Kingsman, head of agriculture at data provider Platts.
"Their buying often feeds on itself."
Analysts say the heavy rainfall in the centre-south of Brazil is one key factor, because it complicated sugar harvesting, and another is demand from the two regions, which are leading importers.
"We certainly believe that import demand has been greater than expected," Kingsman said.
"In our numbers we have increased 2013 raw import demand by close to 7 million tonnes since January - a lot of that into China and Indonesia," he said.
Toby Cohen, a director of commodities house Czarnikow, said the market was in a corrective rally which his company expected to take the form of "a slow grind higher".
"We have therefore been surprised by the strength of the initial move, which has taken physical prices beyond buyers' price targets and in the short term is drawing out further marginal selling - though interestingly at prices that are still below production costs," he said.
"The market place may be under-estimating consumption and demand."
Imports of raw sugar by private dealers to China have exceeded trade expectations, and dealers spoke of strong demand by refineries in Indonesia, another top raw sugar importer.
Indonesia will allow imports of 3.8 million tonnes of raw sugar this year, an industry ministry official said on Friday, up by a third from an earlier forecast as the world's top importer looks to meet soaring demand.
(Reporting by David Brough; editing by Philippa Fletcher)