NEW YORK (TheStreet) -- If investors had hoped stocks had absorbed most of the headwinds associated with lower oil prices, they were sorely disappointed on Wednesday as the commodity crash continued.
Crude prices struggled to remain above $60 a barrel with West Texas Intermediate tanking 5.1% to $60.54 a barrel after OPEC warned that demand for oil in 2015 could slow to its lowest point in 12 years. Just as oil futures stabilized midmorning, the commodity sank to new lows after the EIA reported a large increase in oil imports contributed to oversupply in domestic crude oil inventories for the week.
The energy sector was dragging on benchmark indices with the Dow Jones Industrial Average down 1.5%, or 266 points, and the S&P 500 falling 1.6%. It was the worst drop for both indices since early October. The Nasdaq slid 1.7%. The Volatility Index (VIX.X) spiked 24.2%.
No corner of the oil industry was unscathed by the selloff with the hardest hit including blue-chip oilers Exxon Mobil (XOM) , Chevron (CVX) and BP (BP) , as well as oil services companies such as Halliburton (HAL) , Baker Hughes (BHI) and Schlumberger (SLB) . The Energy Select Sector SPDR ETF (XLE) tanked 3.1%.
Worse, it wasn't just energy stocks that fared badly. All S&P 500 sectors ended the day lower with technology, materials and industrials among the worst performers.
"Historically at least, energy stocks have tended to lead the market," Kingsview Asset Management's Paul Nolte told CNBC. "We're now six months into oil underperforming the overall market, so we may be in for some rough sledding."
The winners of the day were few and far between. Airlines enjoyed a fresh rally as the drop in gasoline prices fueled investor appetite for the sector. American Airlines (AAL) , United Continental (UAL) , JetBlue (JBLU) and Southwest Airlines (LUV) were all higher.
Investors were picking and choosing among retail stocks to determine which might benefit most from lower gasoline prices. Office supplies chains Office Depot (ODP) and Staples (SPLS) were both higher, while retailers Michaels (MIK) and American Eagle Outfitters (AEO) also climbed.
Hopes are high that low gas prices will fuel consumer spending, a segment of the economy that contributes more than two-thirds of GDP. Goldman Sachs analysts estimate the "consumer windfall" from lower gasoline will equate to $125 billion, what they coin a "middle class tax cut."
"While energy prices are capturing a lot of attention, to a large degree it's a holiday-sales-driven market and frankly the results so far have been mixed," said U.S. Bank's Terry Sandven in a call. "The average price of regular gasoline in the U.S. is $2.67, 59 cents below year-ago levels so that's a big drop and clearly bolsters consumer sentiment, and should assist with discretionary spending as well."
Retail sales data will be released Thursday morning. Economists expect an increase of 0.4% in November compared to a rise of 0.3% a month earlier.
Investors were also skittish ahead of the Federal Reserve's monthly meeting next week, particularly whether any indication will be given as to when it could raise interest rates.
"People had started to shift their expectations out to the latter half of 2015 [for a hike], but the good data on employment and especially on the earnings ... really moved people's opinions on what the Fed's going to do," EverBank Wealth Management's Chris Gaffney said in a call. "It's not necessarily a good thing for markets in that the Fed may be coming to an interest rate increase sooner rather than later now."
Though the S&P 500 and Dow closed lower for the third day in a row, it isn't indicative of equities' descent into a bear market through to year end.
"Markets can do anything, but December has very high odds of being an "up" month," Raymond James chief investment strategist Jeffrey Saut wrote in a note. "It is not unusual to see some weakness into mid-month before the Santa rally begins, so it would not surprise to see further attempts on the downside during the balance of this week."
-- Written by Keris Alison Lahiff in New York.