Ok guys so after a little investigating I've figured out what @sanevys is referring to. Thanks for commenting and helping us all out man.

So if you're using "Markdown" which you can select on the right hand-side under the title box. It shows up as "Raw HTML" if you've already started writing your story.

Then you can simply drag and drop, paste or select your images directly and they will be uploaded and "hosted" onto steemitimage.com!

I have no idea why this does not work in "Editor" mode. My advise is to pull your images in and then switch to editor if you find it easier to format that way.