Oil's "crashing week": just 8 days ago it was still "raging with war"; after the midterms, hedge funds sold off US$6.6 billion

Brent crude just suffered the worst weekly decline in history, with the geopolitical risk premium almost entirely wiped out in a single week. Just eight days ago, on October 30, January Brent crude was still trading at a high of US$118, with the market widely expecting Middle East tensions to escalate further after the midterm elections. Instead, the Democrats swept Congress, Trump signaled diplomacy, and Qatari mediation calls landed one after another, sending Brent crude below US$98 by the end of the week. According to Reuters, citing London Stock Exchange Group (LSEG) data going back to 1988, this was the largest weekly decline in dollar terms in Brent crude's history. Hedge funds were the main players in this selloff. According to Robert Quinn, Managing Director in Goldman Sachs' FICC and Equities division, in his latest "Energy Futures" report analyzing US Commodity Futures Trading Commission (CFTC) positioning data, managed money net sold Brent crude positions to the tune of US$6.6 billion between October 27 and November 3 the seventh time in the past five years that weekly selling exceeded US$6 billion while oil prices fell 5.3% over the same period. Long liquidation accounted for US$4.9 billion, roughly three-quarters of total selling, with new shorts playing only a supporting role. Notably, the CFTC positioning report's statistical window ends on November 3 (Tuesday), meaning the US$6.6 billion figure does not yet capture Brent crude's 8.7% single-day plunge on Wednesday, midterm election day. Next Friday's positioning report is expected to look even worse. Longs forced to flee; position buildup sowed the seeds The intensity of this selloff was closely tied to the prior buildup in positioning. Quinn's positioning charts show that managed money net longs had rebuilt to about US$28 billion in October, before plunging to about US$19 billion by November 4, with Brent crude falling from just above US$110 to the high US$90s within days. By comparison, when the Iran war premium was at its most exuberant in April this year, the same group of funds held net longs exceeding US$45 billion. Commodity trading advisors (CTAs) were also deeply caught up in it. Heading into this crash, CTAs held substantial crude oil longs. Goldman Sachs' systematic strategies team noted in a Friday report that trend-following strategies suffered a "major trend break" in early November, with a triple reversal occurring simultaneously bonds rising, equities falling, and crude declining and its fixed-volatility trend strategy down 5.14% month-to-date through November 5, while oil products had been the largest long signal in the strategy's book at the end of October. Goldman's CTA momentum chart shows short-term trend signals have fallen below the zero line turning negative for the first time since August triggering additional systematic selling. Medium- and long-term signals remain positive but are deteriorating at an accelerating pace. More concerning, Goldman's CTA downside convexity analysis shows stop-losses have been triggered, but given the speed of the price collapse, a large volume of systematic sell orders may not yet have been fully executed. Election results were the final straw for longs Before the election results came in, diplomatic signals had already begun to shake the market. According to Quinn's report, Trump was reported to favor negotiation over military strikes, and Iran's Supreme Leader Khamenei authorized the president to pursue dialogue, sending Brent crude lower on November 2, with rebound attempts the following morning also failing. Then the midterm election results became the final straw for longs. Quinn wrote: "The Democratic sweep triggered a narrative of a constrained Trump agenda, particularly regarding funding for overseas military operations and other foreign policy commitments." Brent crude plunged 8.7% in a single day on November 4, with open interest falling by US$2.7 billion. The process displayed a typical structure of "active money leading, trend-followers passively following": active hedge funds sold first, and CTAs then passively joined in. Historical precedent: the two weeks after a crash remain the "darkest hour" After large-scale selloffs, markets typically go through a sustained digestion period. Quinn reviewed history since last year's so-called "reciprocal tariff day" and found that after the previous three instances of similarly large managed money selling in Brent crude, negative fund flows persisted for about two weeks, with the most typical case being after the US-Iran Memorandum of Understanding (MOU) was signed in June 2026 at which point the market had already priced in expectations of a Hormuz Strait agreement in May, Brent crude recorded its largest monthly decline in six years, the MOU landed in June, but the war continued for another five months. However, there is also a powerful counterexample in history: from May 28 to June 4, 2024, hedge funds sold US$7.9 billion of Brent crude after OPEC announced the end of "voluntary" production cuts, but OPEC ministers subsequently publicly pushed back against the market reaction, and managed money net longs fully recovered shortly after. Quinn noted that the prerequisite for this rapid reversal was that "policymakers stepped in to tell the market it had overreacted." Options market: some have started buying calls Despite pressure in the spot market, the options market has shown noteworthy signals. Quinn noted in his report that Brent crude rebounded 3.9% on November 5-6, while at the same time, 3-month implied volatility rose, the 25-delta put-call skew narrowed, and call options were being bought back. This combination of signals indicates that some traders are already positioning for the return of the war premium. UBS's Dominic Ellis also issued a warning on Thursday, arguing that "fundamentals still provide support," noting that the drawdown of nearly 700 million barrels in global inventories will not automatically reverse just because Congress changed hands, and saying the market has repeatedly priced in de-escalation prematurely over the past seven months "I worry the same thing may be happening again now." On the physical side, Gulf crude supply has been returning, and the Dubai benchmark fell into contango for the first time since July, giving bears some support. But according to Reuters, citing UK Maritime Trade Operations (UKMTO) data, the frequency of attacks on tankers remains near historic peaks, and Iran's top security official insists the Strait of Hormuz will remain closed until Washington meets all seven of Tehran's conditions. Additionally, Goldman's Rich Privorotsky noted that gold has become the inverse trade to crude on the day Brent crude crashed, gold rose more than 3%. If the crude war premium returns, gold may give back some of those gains accordingly. "We're not at war" but strikes resumed Friday evening Just as the market was digesting all of the above, a new twist emerged. According to CCTV News, Trump spoke by phone with the Emir of Qatar on Friday to discuss a "comprehensive agreement to end the regional crisis." However, hours later, the White House confirmed a new round of "small-scale" strikes on air defense facilities on Iran's Qeshm Island the first military action authorized by the president since the election. Trump said: "They built a small air defense installation, and we destroyed it in about 15 minutes, maybe 5 minutes," adding that "we're not at war." For a market that had just sold US$6.6 billion on the grounds of "war de-escalation," a weekend airstrike is precisely the kind of policy signal that could turn the previous liquidation into a short squeeze as the 2024 case demonstrated. Next Friday's CFTC positioning report will capture Wednesday's crash and the CTA momentum flip, and the data is bound to look ugly. But structurally, positioning has been substantially cleared out, the options market is buying calls, and the "peace process" itself has landed alongside airstrikes. Brent crude's war premium was priced out in a week at the fastest dollar-denominated pace in history, and the speed at which it gets priced back in may be just as fast. This article is reproduced from "Wallstreetcn," author: Dong Jing; GMTEight editor: Liu Jiayin.