LONDON/NEW YORK (Reuters) - Sentiment in the oil market has shifted dramatically in recent days, with hedge funds, producers and traders all taking a more bearish tack in response to what they see as weakness in worldwide demand.

FILE PHOTO: The sun sets behind an oil pump outside Saint-Fiacre, near Paris, France March 28, 2019. REUTERS/Christian Hartmann/File Photo

The oil market has struggled to sustain a rally despite supply restrictions that generally would be considered bullish. U.S. sanctions on Venezuela and Iran have removed more than 1.5 million barrels of daily supply from the market, OPEC extended a supply-cut deal into 2020 and tensions between the United States and Iran are rising.

Yet, Brent futures LCOc1 have struggled to sustain a move above $65 a barrel and slumped about 7% last week, while U.S. futures CLc1 have rarely moved above $60 a barrel.

“Given all the bullish news we’ve had, the flat price has hardly changed,” said Janelle Matharoo of InsideOut Advisors, a commodities trading and risk management consultancy. “Fifteen years ago, this kind of news would have shifted the price $20, $30 per barrel.”

Hedge funds and investors have exited bullish bets on the realization that demand may be weaker than anticipated while U.S. production surges. Producers, meanwhile, have rushed to lock in future prices, betting that this may be their best chance to protect against a selloff, oil traders and brokers said.

Front-month, or current, futures contracts have not had a massive selloff - but looking at later-dated contracts, the underlying weakness is apparent.

The premium on front-month Brent crude futures compared with oil to be delivered in half a year LCOc1-LCOc7 has fallen from a six-year high in May at more than $4 a barrel to less than $1.50 last week. That is a signal that worries about tight supply have abated.

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Even rising tensions in the Strait of Hormuz, where the United States and others are moving to protect tankers against Iran, have produced only modest gains. On Monday, Iran said it had captured spies working for U.S. intelligence, a report U.S. officials denied. That comes just after Friday’s news that Iran had seized a British tanker.

Brent crude gained 1% on Monday to hit $63 a barrel, still several dollars below the year’s highs. [nL4N24N1Y3]

The steady rise in U.S. oil output and demand worries from a protracted Sino-U.S. trade war, however, have weighed on demand forecasts. The International Energy Agency recently cut its expectation for global demand through 2019 and 2020 and said it may cut it again if the global economy - and especially China -show further weakness, while Saudi Arabian exports fell to a 1-1/2-year low in May.

Traders said there had been relentless selling in bullish Brent call options as far as December 2021 and 2022, a reflection of growing expectations that demand for oil is weakening as supply grows.

“There’s a feeling on the margin that the current price is potentially unsustainable and the market structure supports that,” said Matharoo.

Average 2020 Brent oil prices LCOYstc1 slipped to the weakest in a month at $60.28 a barrel last week. Separately, bullish speculator bets on U.S. crude futures and options on the NYMEX 3067651MLNG are near the lowest level since 2013.

The price weakness presents challenges for oil producers, and many have started to hedge to protect against a damaging future downturn in prices.

With the recent weakness in the market, some consultants are warning about waiting too long to protect against future market moves by buying options to sell or buy oil at a certain price in the future.

“We’re telling producers it’s time to lock in,” said Thibaut Remoundos of London-based hedging consultancy CTC. “We’re less bullish than most of our clients... We believe there is greater downside risk than is priced in.”