The Synthetic: Brian's Story

Around 2010, an energy trader sat in my office and asked me, “Don’t you think we can create a financial hedge for liquid asphalt?” I chuckled and said, “No way!” But the question lingered in my mind. As I began transitioning into retirement, I had time to revisit the idea. I realized that for a hedge to work, it needed two key qualities. First, it had to have a comparable relative value of asphalt to backtest the hedge. Second, the hedge needed to be composed of highly traded financial energy products to ensure liquidity.

It dawned on me that I could use Coker Values as the comparable value because they express the value of asphalt in terms of other products (pet coke, gasoil, naphtha, propane, etc.). These products met the criteria of having value but were not highly traded in the financial markets. Putting on my engineering hat, I performed mass balance equations and studied relative BTU values, ultimately creating an equation that uses energy products in specific combinations and proportions to produce an asphalt value. I call this “The Synthetic.”

I back-tested The Synthetic against 17 years of published Coker alternative asphalt values and conducted a Pearson correlation analysis. The result was 0.98324, indicating a near-perfect positive correlation. The Synthetic’s calculated values were consistently above the Coker Values (see graph), never predicting a value below the published data. This consistency gives me confidence in its ability to predict future prices and produce reliable financial outcomes. I believe that, in the near future, Coker Values will set the floor for wholesale asphalt pricing.

I am offering this innovation to the asphalt industry in two ways. First, through The Asphalt App, available on the Apple App Store and Google Play (snap QR code below). The Asphalt App gives an extimate of future asphalt prices up to 18 months in the futer based on the previous day's energy market closing prices. Users can select the time period and geographic region of interest, and the app presents the a calculated estimate based on the intial Synthetic formula and various variables.

The second offering is an actual asphalt financial hedge. We procure financial energy product futures according to The Synthetic formula. If energy prices rise and the hedge becomes profitable, the financial market offsets losses incurred in the physical asphalt market. This allows you to bid today's cash price plus the cost of the hedge, instead of guessing future prices, without compromising a low bid process. If the market moves in the other direction, the financial loss is capped at the cost of the hedge, meaning the hedge holder pays less than the bid in the physical market.