Physical Differential (or Premium)

The number at which physical transactions are taking place for a given crude oil or oil product relative to a benchmark. Physical trades are negotiated and dealt using a benchmark derivative contract as a reference price. The value of the physical differential is added to the derivative price to determine the full physical transaction value. It is done this way as outright prices of derivative contracts are highly volatile, and  90% or more of the price is correlated with outright prices anyway, making the differential key in assessing material differences in the specification, product type or location.