Physical differential or premium represents the price difference between physical commodity prices and futures contract prices, reflecting factors such as location, quality, storage costs, and immediate availability. These differentials compensate for differences between standardized futures specifications and actual physical commodity characteristics and logistics.

Physical differentials fluctuate based on regional supply-demand balances, transportation costs, storage availability, and quality specifications. Understanding differentials helps assess arbitrage opportunities, physical delivery economics, and the relationship between paper and physical markets. Differential patterns provide insights into market tightness and regional dynamics.

Real-world example: Physical Brent crude oil trades at a $2 premium to ICE Brent futures due to tight prompt supply and strong refinery demand, indicating that immediate physical barrels are more valuable than future delivery contracts.