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Crude oil dropped below $40 a barrel on Wednesday for the first time since August. It's the latest sign that the world still has more oil than it needs despite production cuts in the U.S. This is great news for American drivers, many of whom will soon be enjoying gasoline prices below $2-a-gallon.

That's the cheapest price since the final week of August when market mayhem rocked Wall Street amid fears about China's economic slowdown. Oil settled at $40.75, but it's still down 13% this month.

Everything was selling off in August. This time, oil is falling, but the stock market overall posted solid gains Wednesday and is about flat in November.

Energy bulls had been hoping that the worst was over for oil. Price rose for much of September and October as concerns about a global recession faded. Oil even briefly topped $50 a barrel in early October after Russia launched military operations in Syria, raising the specter of supply disruptions.

But the price fell again, mainly for these 3 reasons:

1.) OPEC fuels 'massive' oversupply:

Last week, the International Energy Agency warned the supply glut is actually getting worse. It reported a record 3 billion barrels of oil in global stockpiles, describing it as a "massive cushion."

The IEA pointed to "vigorous production" from OPEC nations such as Saudi Arabia, which has steadfastly refused to cut output despite depressed prices.

Iraq is also flooding the U.S. with tons of oil. The U.S. more than doubled its imports of oil from Iraq between August and September, according to a Platts analysis. The IEA also said Russian production is at a post-Soviet record and is "likely to remain robust in 2016."

2.) U.S. drillers are resilient

Yes, some cracks have begun to emerge in the U.S. energy boom. American oil production actually decreased significantly from August to September to a one-year low.

But today's oil drillers are sharp, allowing them to quickly ramp up production once prices rise. Baker Hughes said the number of U.S. oil rigs increased slightly last week, the first rise in three months. That's negative for oil prices because the massive growth in American oil production is what caused prices to crash in the first place. Few predicted quite this much oil supply.

3.) The dollar keeps getting stronger

The U.S. dollar continues to strengthen as investors bet the Federal Reserve is finally ready to raise interest rates. So far this month the dollar has soared 3% against a basket of currencies. It's also nearing parity with the euro.

All of that is bad news for oil because a stronger dollar makes commodities like crude that are priced in dollars more expensive to overseas buyers, so they tend to buy even less. The latest slide in oil prices could bring smiles to U.S. consumers as they start shopping for the holidays.

But it will also create headaches for oil companies like Chevron (CVX)and ExxonMobil (XOM). Shares of companies in the S&P 500 energy sector have tumbled 16% so far this year, making them the worst performers. Energy companies that loaded up on debt before oil prices crashed run the risk of defaulting on their loans if they can't make money in the current environment.

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Stocks: Wall Street was led higher by Apple and energy stocks, ahead of the release of the minutes of the Federal Reserve's October meeting which are likely to underpin expectations of an interest rate increase next month.

Apple's shares (O:AAPL) were up 3.2 percent at $117.31 after Goldman Sachs (N:GS) added the iPhone maker to its "conviction buy" list, saying it sees potential for the stock gaining as much as 43 percent from current levels.

Commodities: Oil rose on Wednesday on reports of falling stockpiles and rising refinery activity in the United States, but analysts said a global supply glut would keep prices under pressure.

Brent crude futures (LCOc1) were up 77 cents at $44.34 per barrel by 0937 ET after settling 99 cents lower the day before. U.S. crude futures (CLc1) were up 50 cents at $41.17 a barrel.

Economic Indicators: The number of mortgage applications in the U.S. rose for the first time in four weeks last week, despite rising interest rates, industry data showed on Wednesday.

In a report, the Mortgage Bankers Association said their mortgage market index, a measure of mortgage loan application volume, increased by a seasonally adjusted 6.2% in the week ending November 13 to 433.9. That follows a drop of 1.3% to 408.7 in the preceding week.

Forex: The U.S. dollar edged higher against its Canadian counterpart on Wednesday, as speculation over a potential U.S. rate hike next month supported the greenback despite the release of mixed U.S. housing sector reports. USD/CAD hit 1.3348 during early U.S. trade, the pair's highest since Monday; the pair subsequently consolidated at 1.3334, adding 0.10%.

The pair was likely to find support at 1.3221, the low of November 12 and resistance at 1.3432, the high of September 30.

The U.S. Commerce Department reported that housing starts dropped 11% to 1.060 million units last month from September’s total of 1.191 million units. Analysts had expected a decline of 3.9% to 1.160 million.

Meanwhile, the number of U.S. building permits issued rose 4.1% to 1.150 million units from September’s total of 1.105 million, broadly in line with market expectations.

Policy Makers: Global financial markets have settled since the August turmoil that caused the U.S. Federal Reserve to delay raising rates, so that it will soon be appropriate to make the policy change, Atlanta Fed President Dennis Lockhart said on Wednesday.

"I am now reasonably satisfied the situation has settled down... So I am comfortable with moving off zero soon, conditioned on no marked deterioration in economic conditions," Lockhart told a conference of bankers, traders and regulators.

"I believe it will soon be appropriate to begin a new policy phase," he said, adding he will monitor economic data between now and a policy meeting on Dec. 15-16.

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18

Nov

It's a nervy morning in markets Wednesday as more security fears and the upcoming release of Federal Reserve minutes keep investors on edge.

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