Oil prices have bounced between $70 and $80 a barrel this year. However, crude appears poised to break out later this year. That makes now look like a great time to buy oil stocks.

While there are many top oil stocks, I've zeroed in on Chevron (CVX -2.57%) as the one I want to buy this month. Here's why I believe oil prices appear poised to rally and why Chevron is my oil stock of choice to profit from that thesis.

The case for higher crude oil prices

Changes in supply and demand drive oil prices. Last year, crude prices skyrocketed following Russia's invasion of Ukraine on supply issues. They've since cooled off on concerns that higher interest rates will slow the global economy, impacting demand.

Looking ahead, the International Energy Agency (IEA) sees forces at play that could send oil prices higher. The organization noted in its May oil market report that it expects demand to grow faster than initially anticipated this year. It foresees global oil demand growing by 2.2 million barrels per day (BPD) to an average of 102 million BPD. That's 200,000 BPD more than projected in April, fueled by China. The IEA noted that "China's demand recovery continues to surpass expectations, with the country setting an all-time record in March at 16 million BPD." 

Meanwhile, supplies are tight. The IEA pointed out that significant outages in Iraq, Nigeria, and Brazil caused global oil supplies to fall by 230,000 BPD in April to 101.1 million BPD. Meanwhile, it noted that "steeper losses are in store for May as wildfires shut in Canadian barrels and extra cuts from some OPEC+ producers take effect." Those additional production cuts by OPEC+ will keep a lid on supplies for the balance of the year.

These factors lead the IEA to conclude that "the current market pessimism" from macroeconomic concerns "stands in stark contrast to the tighter market balances we anticipate in the second half of the year, when demand is expected to eclipse supply by almost 2 million BPD." A supply shortfall that wide will undoubtedly drive up oil prices as global oil storage levels drain. 

Why I'm buying Chevron to profit from higher oil prices

Chevron is in an excellent position to capitalize on higher oil prices. The company has a very low-cost oil business. It can generate enough cash to fund its capital program, continue growing its dividend, and repurchase shares at the low end of its $10 billion-$20 billion target range through 2027 at an average oil price of $60 a barrel (including $50 a barrel in 2025-2027). That's more than $10 a barrel below the recent price. Meanwhile, higher oil prices would enable Chevron to generate even more cash to repurchase shares and strengthen its already elite balance sheet.

The oil giant recently put itself in an even better position to cash in on higher oil prices by agreeing to acquire PDC Energy (PDCE). The highly strategic and accretive deal will really move the needle for Chevron. It will increase its oil equivalent proved reserves by 10% for less than $7 a barrel. Chevron expects the acquisition to boost its free cash flow by $1 billion annually, assuming $70 oil. Higher oil prices would enable it to generate even more free cash flow from the acquisition. 

Meanwhile, Chevron trades at an attractive price, despite its upside to oil. Shares have slumped along with oil prices in recent months, pushing down its valuation. It trades at slightly more than 10 times its forward earnings and less than 10 times free cash flow, which makes it a lot cheaper than the broader market. 

A great time to buy Chevron

Oil prices appear poised to rally later this year. That makes now a great time to buy Chevron. Its low-cost oil business will enable it to produce lots of cash, even more so once it closes its highly accretive acquisition of PDC Energy. Add in its low relative valuation, and I think it's a great oil stock to buy this month to capitalize on an eventual upswing in crude prices.