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Physical Differential
Physical differential is the price adjustment applied to a physical commodity compared to a benchmark due to quality, location, or timing differences.
In oil trading, premiums reflect superior grades, strategic storage locations, or urgent delivery needs. Discounts may apply to lower-quality or distant cargoes.
Traders incorporate differentials in pricing, contract negotiations, and hedging strategies to assess net revenue.
Understanding physical differentials is essential for accurate market valuation and operational planning.