LONDON, July 5 (Reuters) - Comex copper futures surged

on Friday as some players bought back bearish, or short,

positions to reduce their exposure due to expected shipments of

copper failing to arrive in the United States, traders and

analysts said.

A frenzied rally based on speculative buying sent copper

futures on both Comex and the London Metal Exchange (LME) to

record peaks in May, partly due to a short squeeze on Comex.

Since then copper prices have slid, partly due to

expectations that shipments of material would arrive in the

United States allowing the cover of exposed short positions.

Short positions can be bets on lower prices or producers

hedging their output. A short squeeze occurs when parties

holding such positions are forced to buy them back at a loss or

deliver physical copper to close them out.

"Some participants cannot stomach the volatility and there

is certainly some panic covering to avoid the moves we saw last

time around," a trader said.

"But if anything the situation could potentially be more

volatile due to the lack of usual participants."

The Comex buying has led to a wide spread or arbitrage

between prices on the two exchanges, with the Comex premium

doubling to more than $300 a metric ton over the past two days.

August futures on Comex on Friday climbed to a

five-week high of $4.6965 a pound or $10,354 a metric ton and

was up 2.5% at 1500 GMT. The market hit a record of $5.1015 a

pound on May 21.

That compares to an intraday peak of LME three month copper

of $10,000 and a gain of 0.7%.

"Inventory that was supposed to come to the U.S. clearly

hasn't arrived," said Dan Smith, head of research at Amalgamated

Metal Trading.

It was unclear what was causing the delay in shipments to

the United States.

The lack of shipments is evident in copper inventories in

CME warehouses, which have tumbled 71% since late March to 8,947

tons, the lowest since 2008, data shows.

"People have already been burned on this once, so they're

much more cautious now, but we're all a bit nervous it's going

to blow out again," Smith added.

During the May short squeeze commodity traders Trafigura and

IXM were looking to buy physical copper to deliver against large

short positions, but it was unclear which participants were

covering positions at the moment.

Comex is owned by the CME Group ( CME ) while the LME is

owned by owned by Hong Kong Exchanges and Clearing Ltd ( HKXCF )

.