Watching commodity markets over recent weeks, one question keeps returning: how much of the economic outcome of a real physical trade does the public benchmark price still explain? It is tempting to compress this into “futures have decoupled from the physical market”. That is not accurate. Futures and the other benchmark markets still perform the price discovery that matters most. What deserves discussion is narrower and, I think, more important: in certain market conditions, the final profit or loss of a physical cargo may be determined more and more by factors that sit outside the benchmark.
None of this is new. For a large physical trader, regional differentials, freight, timing and optionality have always been core sources of both margin and risk. What is worth watching is whether three things are rising at once:
If they are, the risk structure of commodity markets is changing in a way that deserves attention.
A lower benchmark does not mean a lower delivered cost
A commodity is not a number on a screen.
It has to be produced, stored, shipped, financed and insured, and delivered at a specific time and in a specific place. A physical trade can therefore be separated into three parts:
The physical differential is the premium or discount to a defined benchmark for location, quality, delivery window and local supply and demand. Carry and transaction costs cover financing, insurance, storage, demurrage and the other costs of doing the trade.
One caveat. Quotation conventions differ across markets: some delivered quotations already embed the freight leg. Whether freight shows up inside the differential or as a separate cost depends on the benchmark, the delivery basis and the contract terms.
The point is not to argue about which column a given cost belongs in. The point is to avoid one specific mistake:
Once price differences and transaction costs are mixed together, the risk analysis loses its meaning.
Hormuz, September 2026: the flow came back, the cost did not
The Hormuz disruption of September 2026 is a clean example.
As Reuters columnist Ron Bousso wrote on 21 September, suppliers have kept crude moving through ship-to-ship transfers in the Gulf of Oman. Kpler expects around 2.5 million barrels per day to be loaded via such transfers in September, up from 1.4 million barrels per day in August. But the substitute logistics are expensive: benchmark VLCC freight rates for Gulf crude to China have surged above $30 per barrel, according to LSEG data cited in the same column.
That points to a distinction worth keeping sharp:
If a recovery in supply compresses the scarcity premium, the benchmark can ease. At the same time, freight, insurance, voyage time, inventory cycles and the financing tied up in cargoes can all stay elevated. The result is entirely possible:
That does not make the benchmark “wrong”. It correctly reflects the part of the market it represents. The risk carried by a real trade is simply more complex than any single benchmark.
Basis did not suddenly become important. It may be becoming less stable
Physical traders have never traded only the outright price.
Location, quality, timing, freight and optionality have long been where value is made in commodity trading. So describing today’s market as “we used to watch only the price, and now we suddenly have to watch basis” does not match how the industry actually works.
The more precise statement is:
There are historical precedents. What deserves study is whether the current episode shows three things together:
- greater amplitude;
- longer persistence;
- more synchronised occurrence across markets.
If this is a short-lived war shock, the phenomenon should fade as logistics normalise.
If longer-term forces sit behind it, such as falling supply-chain redundancy, geopolitical fragmentation, higher financing costs and constrained transport infrastructure, then it may be more than a temporary anomaly.
Hedging is not limited to the commodity price, but hedgeable is not the same as hedged
A second over-simplification needs avoiding here.
Many non-outright risks do have derivative instruments. Freight can be managed with forward freight agreements or freight futures: the Baltic Exchange has long published FFA-related indices and forward curves, and exchanges such as CME list freight futures and options. Interest-rate risk has its own derivatives. Some regional and product spreads trade as swaps or spread instruments.
So the real problem is not:
“Physical risk is broad, but the financial market can only hedge the commodity price.”
It is:
The practical constraints come from familiar places:
- contracts that do not match the actual exposure;
- thin liquidity in some markets;
- tradable tenors shorter than the business cycle;
- bid-ask spreads that widen under stress;
- margin and liquidity requirements that themselves consume cash.
Even where a hedging instrument exists, that does not mean a company can remove the risk cheaply, for long enough, and completely. Which is why:
The firm ultimately faces a set of related risks, not all of which are tradable.
What should be studied is risk contribution, not price gaps
To turn this observation into a testable proposition, the simplest approach is not to regress one price level on another.
Commodity prices are typically non-stationary. A regression in levels produces an R² that looks impressive and means little. A better starting point is the variance of price changes.
Then:
What matters most here is not only the two volatilities. It is the third term, the covariance between them.
The object of study is risk contribution, not the gap between two prices.
Why the covariance matters
Because non-benchmark factors do not always move in the same direction as the commodity price.
In a strong demand cycle:
Here Cov(ΔB, ΔN) > 0. The non-benchmark factors amplify the outright price shock.
Under some supply shocks the opposite can happen:
Here some logistics factors may show Cov(ΔB, ΔN) < 0, partly offsetting the benchmark move.
So “basis volatility has increased” is not enough on its own. What determines portfolio risk is:
A simple monitoring ratio, not a new theory
For day-to-day monitoring, a very simple indicator can be constructed:
Non-Benchmark Volatility Ratio (NBVR)
NBVR = σ(ΔN) / σ(ΔB). A ratio for continuous tracking, not a new risk theory.
| Reading | Meaning |
|---|---|
| NBVR ≈ 0.25 | Non-benchmark factors move far less than the benchmark. The outright price is still the main source of risk. |
| NBVR > 1 | Non-benchmark factors now move more than the benchmark itself. |
NBVR cannot be used alone. It has to be read together with Corr(ΔB, ΔN): the same ratio means something very different in a positively correlated regime and in a negatively correlated one.
None of this is a new theory of risk. It belongs to the same family of variance decomposition as the minimum-variance hedging and hedge-effectiveness literature. Louis Ederington’s 1979 paper, The Hedging Performance of the New Futures Markets, already measured hedging effectiveness as the reduction in variance. The value of NBVR is more modest:
The real question is not whether futures have failed
By this point the question has changed.
Do not ask:
“Have futures prices decoupled from the physical market?”
Ask instead:
For commodity firms these two questions matter a great deal. If non-benchmark risk keeps expanding, a risk-management framework built only around
is no longer enough. It also has to watch, continuously:
What ultimately has to be managed is not a price.
It is a set of interlinked economic risks.
Conclusion
Basis, logistics and financing were never new problems in commodity trading. Large physical traders have managed them for as long as the business has existed.
So the thing to watch is not:
“Basis has suddenly become important.”
It is:
If that trend holds, reading commodity markets from the headline price alone will become less and less adequate.
The benchmark still carries the most important price discovery. But the final outcome of a real trade depends increasingly on where the price is formed, how the commodity moves, how long capital is tied up, and whether the risk can be transferred at all.
I would compress the observation into one sentence:
What is worth tracking is not whether futures have failed, but how much economic weight the risk outside the benchmark now carries.