Delivery Points and Location Basis

A futures contract for WTI crude oil settles by delivery at Cushing, Oklahoma. A barrel sitting in a tank in Cushing on the delivery date is worth the futures price. A barrel sitting in a refinery tank in Los Angeles is not — moving it to Cushing costs pipeline tariffs, takes time, and might not even be physically possible on short notice. The Los Angeles barrel is the same molecule of oil, but it trades at a different price purely because of where it is.

That price gap is location basis: the difference between the price of a commodity at some other location and its price at the contract's designated delivery point, driven almost entirely by the cost and feasibility of moving it from one to the other.

Why delivery points exist at all

A futures contract needs a single, unambiguous definition of "the thing you get if you hold to expiry," or the contract cannot be a reliable hedge. Exchanges pick one hub — Cushing for WTI, Henry Hub in Louisiana for US natural gas, specific LME-approved warehouses for base metals — because that hub already has pipeline, rail, or storage infrastructure connecting it to the rest of the market, so delivery obligations can actually be fulfilled there.

Every other location's price then relates to the delivery-point price by a simple identity:

$$P_{location} = P_{hub} + \text{Basis}_{location}$$

In words: the local price equals the hub futures price, plus or minus an adjustment specific to that location. A positive basis means the local price is a premium to the hub (local supply is tight, or shipping to that location is expensive); a negative basis means a discount (that location is oversupplied, or shipping away from it is expensive).

What moves the basis

Three things dominate: the cost of physically transporting the commodity to or from the hub (pipeline tariffs, rail freight, trucking), local supply-and-demand imbalances that transport cost prevents from arbitraging away instantly, and infrastructure bottlenecks — a pipeline running at capacity cannot carry more oil no matter how attractive the price gap becomes, so basis can blow out even when the underlying commodity itself is not scarce anywhere.

Worked example

WTI futures settle at $75.00 per barrel, delivery at Cushing. A refiner in the Permian Basin, 500 miles away, needs to know its local price. Pipeline tariff from the Permian to Cushing is $2.10 per barrel, and local Permian supply is currently running slightly ahead of pipeline capacity, adding another $0.80 per barrel discount to entice sellers to hold or find alternative outlets.

1. Transport cost. $2.10 per barrel to move a Permian barrel to Cushing.
2. Local oversupply discount. $0.80 per barrel, because pipeline capacity out of the Permian is the binding constraint, not demand for the oil.
3. Location basis. $-2.10 - 0.80 = -2.90$, so Permian basis is -$2.90 to the futures price.
4. Local price. $75.00 - 2.90 = 72.10$, or $72.10 per barrel at the Permian wellhead.

A trader who forgets step 2 and prices the Permian barrel only on transport cost overpays by $0.80 every barrel — the gap between "what it costs to move it" and "what it's actually worth where it is" is exactly what location basis captures.

What this means in practice

Basis trading is a distinct business from outright commodity trading: a trader can be flat on whether oil prices rise or fall and still make money buying at a wide, temporary basis in one location and selling (or delivering) at the hub, betting the basis narrows back toward transport cost. Pipeline expansions, new export terminals, and refinery outages all move basis independently of the front-month futures price, which is why physical desks watch regional basis quotes as closely as the futures curve itself. New Permian pipeline capacity coming online, for instance, mechanically narrows Permian basis over time as the bottleneck that was widening it disappears.