SureAI

I noticed that spell damage seems to directly tied to how much fatigue you have, dropping to about 30% when exhausted, and going well above 100% depending on what my max fatigue is. Is this some kind of intentional balancing thing, or a bug? It kind of makes being a battle mage annoying because meleeing weakens your magic.

It is in fact, intentional.

Spells already got quite an upgrade, battlemage would be the easiest pick - otherwise you could attack with sword & broad/2h when your mana is low & attack with spells when your fatigue is low - at the moment that doesn't work, because both are tied to your fatigue.

Willpower/endurance is what builds up fatigue. Build up your blocking skill and be prepared for battles to last slightly longer than those involving magic spamming. Casting seems to drain almost no fatigue and power attacks are not as affected by low stamina as normal attacks are.