The recent rally in crude oil prices offers some hope that we’re closer to the end of crude’s collapse than the beginning. Of course, the passage of time also helps. After all, crude’s decline had been more or less under way since late June, before its selloff sharply accelerated during the fourth quarter.

That means slightly more than seven months had elapsed by the time North American benchmark West Texas Intermediate crude (WTI) hit an intra-day low of $43.58 per barrel on Jan. 29, based on pricing data for the generic front-month contract, according to Bloomberg.

As my colleague David Dittman noted in our December issue, the five bear markets in crude that occurred prior to the latest one typically lasted less than eight months.

And while we don’t expect oil’s eventual recovery to be V-shaped, as David wrote in this month’s In Brief, it’s important to remember that crude’s head-spinning volatility can occur on the upside as well as the downside.

Indeed, technically speaking, oil’s recent rally took it high enough to qualify for the textbook definition of a bull market. Yes, you read that right.

At its year-to-date high earlier this week, crude was up 24.5% from its late-January low. The price has slid once more following the release of government data that showed U.S. crude supplies at an 80-year high. But it’s still 18.6% above its low.

While it’s too soon to tell if we’ve already seen the bottom in oil prices, even before late January the consensus among analysts seemed to be that crude would hit a low at some point during the first quarter, with a modest rise in the second quarter turning into a more moderate ascent during the back half of the year.

So, what are they saying now? Unfortunately, only five of the analysts Bloomberg tracks have updated their forecasts since Jan. 29, too small a data set to be of any significance.

But if we’re willing to look back as far as Jan. 8, when WTI closed at $48.79 per barrel, then we can average the forecasts of 25 analysts, which may be more instructive. On that basis, the consensus forecast is for WTI to average $50.95 per barrel during the second quarter, jump to $58.44 in the third quarter, and then climb to $64.80 in the fourth quarter.

Though the consensus projection for the fourth quarter is still down nearly 40% from last year’s high, it’s starting to be in the zone where a significant percentage of unconventional production becomes economic again—especially if the costs of production that were driven higher by triple-digit oil prices, such as skilled labor and services, come down in the interim.

Circling Vultures

But perhaps an even stronger indicator that crude has already bottomed or is at least close to its ultimate bottom is the fact that vulture investors are now circling the energy sector.

We’ve repeatedly said that one of the big winners during a sector downturn is an industry player that has the scale and the balance sheet to endure the decline while opportunistically acquiring solid assets, or even whole companies, on the cheap.

In fact, we’ve already seen that happen with Spanish energy giant Repsol’s USD8.3 billion bid to acquire Canada’s Talisman Energy (TSX: TLM, NYSE: TLM).

But now hedge funds and private equity are getting in on the game, too, even though they’ve hardly escaped oil’s bear-market bruising.

For a retail investor, it can be psychologically difficult to pile into a bear market even after stocks have already suffered crushing losses. That’s because the reward for being too early is catching a falling knife.

But the so-called smart money can afford to think of the long term and are, therefore, willing to take that risk. And they have multiple avenues to success when vulture investing.

As crude’s swoon deepened, vulture investors made their first forays into the energy sector via selective investments in high-yield debt. Some of these securities were trading at distressed levels—down 17% since crude’s peak last year—offering the prospect of equity-like returns if their issuers endure the downturn without defaulting.

As Carlyle Group LP co-founder David Rubenstein recently put it, “The single best opportunity to invest is distressed debt in energy.” The New York Times says he added that one strategy is buying up distressed debt and then using it as a vehicle to take control of a company.

According to Bloomberg, Carlyle and its peers, including Blackstone Group LP, KKR & Co. LP and Apollo Global Management LLC, have raised more than $15 billion recently for energy sector plays and are “scrambling” to deploy it.

In addition to high-yield debt, these investments could take the form of scooping up assets in emergency sales, extending financing to troubled companies, and acquiring companies outright. 

And with the lower exchange rate, the dollars of U.S. private-equity firms will stretch even further.

Meanwhile, their Canadian counterparts are also poised to take action, with what The Globe and Mail colorfully described as a “bring it on” attitude. 

According to an industry survey, 61% of Canadian private equity firms believe crude’s downturn has “improved their business outlook.”

The newspaper says the head of Toronto-based energy hedge fund Stephenson & Company Capital Management lists long-suffering Lightstream Resources Ltd. (TSX: LTS; OTC: LSTMF) and Canadian Oil Sands Ltd (TSX: COS, OTC: COSWF) among the firms that are “obvious” buyout targets.