Thesis: Oil is one of the tools being used intraday to compress the VIX. Central banks use various oil contracts intraday to control the VIX (but its only one tool; others are USD and the new VIX ETFs - SVIX, UVIX, etc. and the 1dte VIX options).
I am not a graphic designer so excuse the simplicity of the following but I like to keeps things simple.
Suppress Oil and suppress VIX - easy to see.
In the above its easy to see why Oil is so important.
If the Fed wants to support the market, it must lower inflation.
To lower inflation, it must keep oil low.
If it can keep Oil low, inflation stays low, interest rates stay low, the VIX stays low and the market goes up.
The Fed has a problem:
Inflation has been rising, and I dont care what the Fed says because I see it food prices, mortgage rates, everything.
Rates have been RISING.
The way to lower inflation is for the Fed to PULL money out of the system.
BUT THE FED HAS BEEN INJECTING LIQUIDTY TO PREVENT THE COLLAPSE OF BANKS. This is seen by the growth of the Fed's balance sheet:
The Fed's balance sheet grows when among other things, they lend more money to banks via the Discount Window. They can do other things but this is the primary way.
Here's the problem and its simple supply and demand:
When there are more dollars (liquidity) chasing the same amount of product, the prices of the products rise (inflation).
THEREFORE: the Fed should be pulling liquidity not adding if they are worried about inflation. But they are not. Why?????
These are the reasons:
If they pull liquidity then banks balance sheets will worsen and more banks will fail.
If more banks fail, then economies and countries will worsen. Credit Suisse??
If countries fail, then the US has much less control over how those countries behave.
And if countries and banks fail, then the bankers behind both make a lot less money, or in some countries, they go to jail.
If bankers go to jail, politicians at the very least dont get reelected and at worse, they die.
Ok, so now that we have the relationships and the possible outcomes, how does the Fed monkey hammer the oil market down???
First, look at this chart. The purple is the VIX. The bars are oil. Heres the last couple of months. When Oil goes down, VIX for some reason goes down. Pretty easy to see.
If the VIX goes up:
Rates go up = BAD
Market goes down = BADDER
HOW ARE THEY DOING THIS?
Well the release from the SPR helped but there is only so much oil in SPR.
Through the oil futures market
Through the oil options market
Through the oil spot prices
With help from its friends Japan, Europe, the devil (JPM), etc. <--- they also use #2-4 to assist.
There you go. An oversimplified explanation how oil is being used to suppress the VIX and why keeping the VIX low is so important.
Of course, as I shared, the Fed has many more tools to compress the VIX which supports the market.
The Fed can print more money which has the effect of lowering interest rates which is deflationary. Less dollars chasing the same products forces the product prices down.
The Fed can lend less money to banks - WAIT, NO THEY CANT BC THE BANKS WILL FAIL. HAHAHA - Fed is stuck.
The Fed can let the VIX rise and let the market fall, which is very devaluing. NOPE, CANNOT DO THIS BC BANKS WILL FAIL.
The Fed is playing whack a mole - my bet is that sooner than later they fail.
Bottomline: The Fed is stuck between supporting our economy, THEIR JOB, and saving banks that shouldn't have been saved in 2008 - $CS et al. They are trying to do both but at the end of the day, they know if they let more BIG banks fail, then everything gets much worse. Remember that Credit Suisse has $17 Trillion in derivatives. If they fail, game over.