A much-awaited recovery in oil prices has seen investor appetite for Shell (LSE: RDSB) shoot higher in recent weeks. From striking its cheapest since 2003 at $27.67 per barrel back in January, the Brent benchmark has leapt back above the $40 milestone in recent days to its costliest for almost three months.

As a consequence, Shell has seen its share price leap almost 30% in the same period as optimism over the firm’s earnings picture has improved.

But is the market failing to properly assess Shell’s precarious dividend outlook?

So what does the City think?

Well, the Square Mile’s army of brokers believe Shell will make good on its pledge to fork out a dividend of “at least” 188 US cents per share in 2016. Such predictions leave the oil colossus with a delicious 7.7% yield, smashing the wider FTSE 100 average of 3.5% to smithereens.

This comes despite expectations of a further 31% earnings slide this year, meaning that the predicted payout dwarfs expected earnings of 112 cents. And I believe it is highly questionable that Shell has the financial strength to make good on such a payment, with its shaky balance sheet put under extra stress by the $53bn acquisition of BG Group.

Shell is looking to offload $30bn worth of assets through to 2018 to mend its sickly finances and maintain generous shareholder rewards. But the business may struggle to attain ‘fair value’ for its projects given the sickly state of the oil market, a situation that is also casting a pall over the prospect of an earnings recovery from next year onwards.

Is oil overbought?

Indeed, the stunning recovery in the oil price fails to reflect the chronic oversupply washing over the industry, in my opinion.

Rather, rampant buying seems to have been based on hopes that an OPEC-led supply cut is in the offing, as well as expectations that fresh action by the People’s Bank of China will underpin a  recovery in oil demand. Both these scenarios remain highly speculative, in my opinion.

Firstly, certain OPEC members and Russia have been engaged in talks concerning a production freeze, not an actual cut which is required to hack away at bloated inventories. But even hopes of a cap are starting to recede — Kuwait’s oil minister told Reuters just this week that the country would refuse to lock output unless all major producers agreed to an accord.

Iran has already announced its plans to hike production to levels before Western sanctions kicked in, rendering the chances of such an agreement being made as slim to none. And production from fellow OPEC members Iraq and Libya also threatens to move higher in the months ahead.

China chills

And back on the demand side, the prospect of a prolonged downturn in the Chinese economy still casts a pall over global oil demand forecasts.

Activity on the country’s factory floors continues to fall off a cliff — latest trade data showed exports slump by a quarter in February — while rumours persist that Chinese demand forecasts remain too bullish. Just this week Deutsche Bank analyst Michael Hsueh told Bloomberg that oil consumption growth in China could halve by 2020 as demand to fuel vehicles cools.

Given that supply and demand indicators across the oil industry continue to worsen, I believe those piling into Shell in the hope of a sudden upturn could end up sorely disappointed. Indeed, I reckon the oil giant is in danger of disappointing investors seeking plentiful returns in the years ahead.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.