Wall Street's smart money is making big bets on crude oil again

Wall Street's smart money is falling back in favor with the beaten down energy sector.

Large private equity investors moved to the sidelines of energy-related corporate debt as crude oil prices fell.

These days, however, they're doing the due diligence that precedes making big deals on the sector's continued recovery, according to Thomas McNulty, a Houston-based director in the valuations and financial risk management practice at Navigant.

These players are observing what may be a bottoming in the oil crash.

Oilfield services companies, which were hardest hit by the oil downturn, are a good indicator for how the broader industry is turning, according to McNulty.

"When you start to see them not lowering prices anymore for drilling day rates, equipment, fluid, water disposal, and in some cases maybe a tiny-little price increase, that tells you that you're in the vicinity of a bottom," McNulty told Business Insider.

Schlumberger and Halliburton, the world's big-two oilfield services companies, said in their second-quarter earnings calls that they were working to renegotiate prices.

Oil drillers have been bringing rigs back online in the last few weeks, following a slump as oil prices fell. By Baker Hughes' count, 76 oil rigs were added during the past eight weeks, the most since 2014.

"It is clear that there has become comfort around profitability in certain parts of the country at this price level, and I think it's bullish," McNulty said.

'They don't like money sitting around'

It's difficult for private capital players to sit on large piles of money for long, because investors start to demand that their money be put to work. And recently, McNulty said he's heard that investors are starting to make those phone calls.

"They don't like money sitting around with interest rates at zero," he said. "There hasn't been as much activity as we would have thought, but the distressed players are coming in to take positions in debt."

Outside of players in corporate debt, there's other evidence that sentiment towards the industry is improving.

Hedge funds and other money managers increased their net long position - the surplus of bets for a price increase over bets for a fall - in the main futures contracts for Brent and West Texas Intermediate crude oil by 118 million barrels in the week to August 16, according to Reuters.

That was a record one-week increase, the report noted, which came from many managers who had bet against oil prices.