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GRAPHIC-Fund bulls hold nerve on oil price as futures market wavers

LONDON, Oct 24 (Reuters) - Hedge funds have stuck to their bet that oil prices will extend gains, even though the futures market shows some investors are losing faith in a rebalancing of supply and demand.

The premium of front-month December Brent futures over the January contract is at its narrowest since early September. A larger premium, or backwardation, of the front month over future months tends to indicate that traders and investors believe oil supply will fall short of demand.

The Organization of the Petroleum Exporting Countries, Russian and other producers aimed to achieve this market structure by agreeing to cut 1.8 million barrels per day (bpd) of output from January until March 2018, encouraging owners of physical barrels to reduce inventories to fill the supply gap.

December Brent futures are 11 cents a barrel above those for January, compared with a premium of 75 cents in late September, after Hurricane Harvey hit the U.S. Gulf Coast oil hub, hitting the U.S. oil industry and spurring demand for non-U.S. crude.

The managed money net long has more than doubled in four months, while the price has risen 30 percent to almost $58 a barrel.

"This makes it likely that the amount of money invested in rising prices over the last couple of weeks was actually at a high which surpasses the previous peaks seen in 2014, prior to the major price falls, as well as earlier this year when net length was built up considerably around the time OPEC production cuts kicked in," JBC Energy said in a note.

Fund holdings of Brent futures and options hit a record high of 508,645 lots, equivalent to nearly 509 million barrels of oil, four weeks ago.

Money managers have since then snipped net long holding to 494,139 lots in the latest week, equal to 16 percent of total open interest, but that is still just short of February's record ratio of 18 percent.

The average was 9 percent in the past five years.

(Reporting by Amanda Cooper; Editing by Editing by Edmund Blair)