The landed-cost calculation that decides where a cargo actually goes.
WHY IT MATTERS
An apparent regional price gap is tradeable only if it remains positive after freight, insurance, quality and timing are included.
An arbitrage in crude is not a price difference. It is a price difference that exceeds the full cost of capturing it, and freight is usually the largest term in that cost. The calculation is called a landed cost or a netback depending on which end you start from, and it is the single most practical piece of arithmetic in the physical market.
the reference price over the agreed pricing window
grade differential
the agreed premium or discount for this stream
freight
the Worldscale rate converted to $/bbl for this grade
losses
in-transit loss allowance, small but real
Compare the landed cost against the destination market's own price for a comparable barrel. Positive gap, and the arbitrage is open.
WORKED EXAMPLEDoes the Atlantic arb work?
USGC grade price$71.20 /bbl
Freight USGC to northwest Europe$1.45 /bbl
Insurance and losses$0.10 /bbl
Landed cost in Europe$72.75 /bbl
Comparable European barrel$73.40 /bbl
Gap of $0.65 /bbl: the arb is open on these numbers
Illustrative figures chosen to show the structure of the calculation, not a market observation.
Each link in the chain from benchmark to landed cost.
Two properties of this calculation matter more than the arithmetic.
First, freight is the volatile term. Grade differentials move slowly and benchmarks move together; tanker rates can double in weeks. So an arbitrage that was open can close because of freight alone, with no change in either crude price, and the resulting trade flow change looks inexplicable if you were only watching crude.
Second, the arbitrage is self-closing. Cargoes moving to capture it raise the price at the origin and lower it at the destination, and they simultaneously consume tonnage and raise freight. All three effects narrow the gap. An arb that stays open for a long time usually indicates a constraint somewhere rather than a persistent free lunch.