Squeezes and Corners in Physical Markets

Every futures contract that isn't cash-settled has a promise buried in it: at expiry, the short must actually deliver the physical commodity, and the long must actually take it. Almost nobody wants to do this — most positions are closed out before expiry. But that final promise makes a squeeze possible. If someone quietly accumulates both a large long position and a large share of the deliverable supply, shorts who left it too late find there is barely anything left to buy to close out or deliver against. They are forced to pay whatever price it takes.

Why deliverable supply is the vulnerability

A futures contract's open interest can run into the tens of billions of dollars, but the actual commodity sitting in approved warehouses, available and gradeable for delivery, is usually a small fraction of that. That physical stock is the deliverable supply — finite, visible (exchanges publish warehouse stock reports), and slow to grow, since moving more commodity into delivery position takes time and paperwork.

A trader running a squeeze targets that bottleneck directly: buy up futures for the delivery month, and simultaneously buy or control the physical stock that would otherwise satisfy those contracts. As expiry nears, shorts still open face two bad choices — buy back futures at a price the squeezer sets, or scramble to source physical supply that increasingly doesn't exist. Either way, the nearby contract's price spikes far above the more distant, unaffected months.

Worked example

Suppose deliverable stock of a metal in exchange warehouses is 40,000 tonnes, but open interest in the expiring contract represents 90,000 tonnes of obligations two weeks before expiry. One entity has quietly bought futures equivalent to 55,000 tonnes and holds warrants (title to warehouse stock) on 30,000 of the 40,000 tonnes physically available.

That leaves only 10,000 tonnes of free physical supply against 35,000 tonnes of futures still held by other shorts. They cannot all deliver or all buy the physical commodity, so most must buy back futures from the entity holding the long — at whatever premium it chooses, being effectively the only seller left. If the nearby contract traded at $9,200/tonne before the squeeze, it might reach $11,500/tonne in the final days, while the contract three months out still trades near $9,300/tonne.

What this means in practice

Exchanges watch for this pattern explicitly: a large long concentrated in the delivery month, shrinking deliverable stocks, and a nearby-versus-deferred spread blowing out. Most exchanges have position limits and can force liquidation of "excessive" positions to prevent corners. Historic examples — the Hunt brothers in silver, various LME copper and zinc episodes — follow the same shape: a delivery-month spike, a violent reversal once position limits or new supply break the corner, and losses concentrated among shorts slow to react.