UPDATE 2-CME boosts margins for copper futures after sizzling rally to record

(Adds more details of margins and delivery in pargraphs 6-7, updates prices)

By Eric Onstad

LONDON, May 16 (Reuters) - The CME Group will lift margin requirements for copper futures, which hit record highs this week as investors with bearish positions were squeezed, attracting further buying by speculators.

The rally that has seen CME prices jump nearly 30% so far this year would likely remain on the boil in the short term, including on the London Metal Exchange, analysts said.

The U.S. exchange operator raised the outright margins on copper futures by $500 to $5,000 per contract, effective after the close of business on Thursday, the CME's clearing house said in a notice.

The CME also pushed up margins for spreads of the metal used in the power and construction industries, with the July/August spread jumping by 25% to $500.

Sources told Reuters on Wednesday that the CME rally was partly fuelled by commodity traders Trafigura and IXM seeking physical copper to cover large bearish positions on the CME.

But finding copper that can be delivered on the CME has been tricky because much of LME inventories are Russian origin, which is not accepted on the CME. The U.S. exchange also does not allow metal produced in top refined producer China.

Trafigura was asking producers to redirect material from other destinations to the US, the sources said.

The hefty jump in CME copper prices has outpaced gains on the LME and created an opportunity for traders to buy on the LME and sell on the CME, known are arbitrage trading.

"We expect the Comex premium over LME to narrow as arbitrageurs ship physical units to the US, but this will take time," Citi analyst Max Layton said in a note.

May Comex copper futures hit a record of $5.1775 a lb on Wednesday and were down 1% at $4.9225 on Thursday at 1320 GMT.

Analyst Ed Meir at broker Marex said technical signals were not yet showing a peak in Comex copper.

"Although prices came off their highs, they still finished with decent gains, especially in the forwards and thus avoided the washout usually associated with a peak," he said in a note.

The Comex May contract at its peak was equivalent to $11,414 per ton while the LME price benchmark price has risen as far as $10,445.50 a ton and was up 1.2% at $10,340 on Thursday. (Reporting by Eric Onstad; editing by Jason Neely, Kirsten Donovan and Michael Erman)