Physical withholding concerns a strategy to manipulate markets. Therefore, physical withholding is prohibited.
In general, price setting mechanisms should work correctly. More specifically, the price of a commodity or commodity contract reflects scarcity, among many other factors. One can expect that in certain situations a scarcity premium will be built into prices, and prices will rise accordingly. This could for example appear where the margin between available capacity and peak demand becomes tight. This price rise will provide a signal to the market that should encourage investment in production or a demand side response, which will be to the benefit of future consumers.
Physical withholding concerns actions undertaken by persons that artificially cause prices to be at a level not justified by market forces of supply and demand. In physical commodity markets, this includes actual availability of production, storage or transportation capacity, and demand.
Physical withholding concerns, for instance, the practice where a market participant decides not to offer on the market all the available production, storage or transportation capacity, without justification and with the intention to shift the market price to higher levels. An example concerns not offering on the market, without justification, a power plant whose marginal cost is lower than the electricity spot price, which would cause scarcity and, hence, upward price pressure. Another example of physical withholding concerns misusing infrastructure, such as transport capacity or storage capacity, that would result in abnormal high prices. In other words, by withholding capacity, one creates scarcity. And, hence, one could influence the price.