European politicians are working overtime to avert a default on Greece; unfortunately, it doesn’t seem to be working.

Most traders and analysts think that a Greek default is inevitable and once that country goes it could create a domino effect throughout the Euro Zone.

Most traders and investors are shedding risky trades as fast as possible and jumping into the U.S. dollar as a safe harbour even in these markets, gold is having problems attracting buyers. In this environment only the strong survive but where does that leave oil prices?

Because of growing energy needs, there is still a strong demand for oil around the world, which helped propel prices to $90 earlier in the summer, just before the latest crisis started. Although demand has helped oil prices weather the recent economic turmoil, the market is starting to change; oil prices starting following equity prices lower.

In the last few weeks there has been a strong correlation between the S&P 500 and oil prices. According to Lior Coheh, commodities analyst at Trading NRG, WTI had a correlation of 0.638 with the general market and Brent Crude had a correlation of 0.519.

Last week S&P futures dropped to around 1,120, which is the support area from the sharp slide in August. At the same time WTI futures dropped through support at $80 and ended the week at $78.36.

Energy traders will continue to monitor equity markets to gauge investor sentiment. The further equities slide the harder it will be for oil prices to recover.

Is Oil Leading Stocks?

There is some growing concern in the marketplace that oil’s break below support could be a leading indicator for equity markets. Another decline in oil prices in the short-term could highlight the fact that the economy is in much worse condition than originally thought.

Phil Flynn, energy analyst from PFG Best, pointed out in a recent commentary that because of the strong demand, oil prices are not impacted by the same economic turmoil that can cause equities to drop. The fact that oil prices are dropping does not bode well for the general economy.

“My Take is that if oil closes above $80 (Friday) we will have a short term bottom on stocks! If not get ready for Black Monday,” he wrote in the commentary.

The next major support level for oil prices is around $75 a break below that could lead prices to touch $70, which would be its lowest price in almost a year. Because of the strong volume on Friday’s selloff, momentum favours lower prices in the short-term.

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For more updates from Greg, be sure to visit his blog at TheTradingZone.com