The London Metal Exchange (LME) aluminium price has on Friday morning touched $2,021.50 per tonne, its lowest level since April.

The "Russian Premium", which resulted from the April 6 imposition of U.S. sanctions on Oleg Deripaska and his Russian aluminium empire Rusal, has been fully unwound.

The market is expecting sanctions to be lifted but aluminium's slide is also part of a broader metals retreat as macro concerns trump micro narratives.

That LME price, however, is for metal in three months time, a quirk of the London market that sets the global price benchmark.

Right now aluminium traders have much more pressing concerns in the form of a ferocious squeeze on the fast approaching July prompt date.

This is a market that is no stranger to sharp contractions in LME time spreads, but these squeezes are becoming both more frequent and more violent.

The obvious explanation is that curve tightness reflects low LME stocks, which have fallen to pre-financial crisis levels.

But is it now starting to tell us something more about what is happening to the massive off-market stocks that have been a feature of the market ever since 2008-2009?

Graphic on LME aluminium stocks and cash-to-three-months spread: tmsnrt.rs/2NKdv50

DOMINANT LONG PUNISHES SHORTS

Next week is the LME's "third-Wednesday" prime prompt date for July. It's another quirk of this exchange that the clear-out of positions will actually take place on Monday.

If you are short aluminium and want to stay that way, you have to roll the position forward. It's either that, buy back the position or, if you have it, deliver physical metal into an LME warehouse to settle the position.

To roll to next month, August, will currently cost you $68 per tonne CMALN18-Q18.

Someone is holding a big long position on Monday. The LME's daily positioning reports <0#LME-FBR> show one entity with a position greater than 40 percent of market open interest, something in excess of 300,000 tonnes.

Unsurprisingly given the financial pain of rolling, one or several shorts have opted to deliver metal into the LME warehouse system. Just over 80,000 tonnes have been put on LME warrant in the last three weeks, including another 11,675 tonnes on Thursday.

Others are re-warranting metal that had been waiting physical load-out. There were 7,950 tonnes of such "reverse cancellations" at the Spanish port of Bilbao on Thursday as well.

LME stocks have stopped falling for now, but at a current 1.145 million tonnes they have returned to where they were before the Global Financial Crisis.

Strip out the metal awaiting load-out and "live" LME tonnage available for contract settlement stands at just 970,725 tonnes.

SHADOW STOCKS

Of course everyone knows there is more metal sitting "out there" somewhere in the shadows beyond the exchange's statistical light.

That's why the LME aluminium contract has been prone to sporadic gyrations in the time-spreads in recent years.

Most of that hidden inventory, and for that matter a good deal of the LME inventory, is being financed by traders and banks. Financiers lock in a spread that makes physically holding the metal profitable, which means buying nearby and selling forward.

The short legs of those deals have come in for repeated targeting, causing sharp contractions in the spreads.

But the spread pain seems to becoming hard-wired into the LME contract.

The benchmark cash-to-three-months spread CMAL0-3 has just hit the $50 backwardation level for the third time this year. The cash premium had only been that high once in the previous decade, namely December 2012.

The inference is that this increasingly frequent tightness is starting to reflect something more than the machinations of the LME paper market.

The existence of those huge "shadow stocks" has made it impossible to read LME stock movements as an indicator of underlying market dynamics.

Storage dynamics have determined LME stock movements as financiers cut the cost of their trade by chasing the cheapest storage options, which usually means not in an LME-registered shed.

The disappearance of much of the LME stock is down to such warehousing differentials, particularly after the exchange forced its warehouse operators to load out faster.

At times of spreads crisis, some of it reappears, as is happening now.

GROWING DEFICIT, FALLING STOCKS

But underlying all this coming and going in the LME system has been a steady drawdown in the "shadow" stockpile, according to research house CRU.

CRU estimates that unreported stocks outside of China fell by 800,000 tonnes in the second quarter of this year.

Things are complicated by the Rusal sanctions so there was also a 150,000-200,000 tonne stock build in Russia itself.

But it was another quarter of inventory draw. "Shadow stocks" have fallen steadily from 10 million tonnes at the start of 2016 to just over six million tonnes at the end of the second quarter, according to CRU.

And they will continue sliding as the world moves into a period of extended supply-demand deficit, which CRU pegs at 1.6 million tonnes this year.

The shortfall will largely manifest itself outside of China, the world's largest producer, which is expected to remain a broadly balanced market.

China's natural surplus will continue flowing into the rest of the world in the form of semi-manufactured products ("semis").

Such exports are on the rise. Total aluminium exports of 510,000 tonnes in June were the second highest ever. Remove the alloy that China exports and implied semis exports were around 462,000 tonnes, bringing year-to-date growth to 15 percent.

The irony is that it's China's over-production and exports that have roiled the rest of the world, first and foremost the United States, which has responded by putting 10 percent tariffs on imports from just about everyone.

However, the rest of the world now relies on China's exports to mitigate its own growing deficit.

LME shorts, on the other hand, need aluminium in deliverable commodity form, not after first-stage fabrication.

China has a lot of that as well but it's trapped behind a 15 percent export tax.

And if CRU are right, the dark pool of the right sort of aluminium is shrinking all the time.

There could be yet for more pain for any remaining shorts on the LME's July date. We'll see.

But it's looking increasingly certain we're going to see more of these LME squeezes going forwards. On current trend, they're only going to get more severe.