A major sell-off in stock markets continues to push energy prices lower for a 3rd straight day.  So far the action in energy markets has been relatively orderly compared to the wild swings we’ve seen in years past, but prices are teetering on the edge of breaking technical support layers, so things might get a little sporty if equity markets don’t calm down soon.

The DJIA had its largest point drop in history Monday – and what’s amazing is it still settled some 400 points off the lows for the day – and the major US Indices all had their largest percentage declines since 2011.  The bleeding in stocks is not yet over as Asian equity markets sold off heavily overnight, with losses ranging from 4-5% on the major indices, and US equity futures are pointing to another +2% drop when trading begins later this morning.

The negative sentiment from the stock sell-off has clearly crossed over into energy markets, but as the chart of Oil Volatility (OVX) below shows, so far the reaction has been relatively minor compared to what we’ve seen the past few years.

Equity volatility meanwhile had its largest single day increase yesterday, with the VIX surging from 17 on Friday to 37 Monday.  While that spike is impressive, and a clear sign that fear has grabbed hold of the markets, it pales in comparison to the 80 readings witnessed in 2008, or even the 40s we saw in 2010  and 2011, but early indications suggest we may see the VIX move above 50 today.

The big question for oil markets is how will the record amount of speculative money that’s already placed bets on higher prices react to the sell-off in oil and the panic in stocks.   There’s an argument that those speculators may simply ride out this sell-off as oil makes a nice hedge of inflation, while others suggest that the leverage employed by hedge funds and other money managers may force more selling as they need to be able to pay for positions that are suddenly unprofitable.

The weekly charts are starting to show trend lines breaking.  Peg the $63 range as a must hold for WTI this week.  Brent is already trading below $67, which would break the bull trend line in place since July.  ULSD is seeing a similar breakdown in its weekly charts, and if it can hold below the $2 range this week, the door is open for another 10 cent drop.

CLICK HERE for a PDF of today’s charts