Even though Canada's big oil producers are raking in profits on high crude prices and stellar refining margins, their share prices are languishing as investors fret about the economic risks that could slow global petroleum demand.

At the top of the list is fear of a possible European debt default, a concern that is particularly acute in the oil markets. As a consequence, the Toronto Stock Exchange's energy group is 27 percent below its year high, the biggest drop among the index's 10 main sectors, and the shares of most big Canadian oil companies are trading close to their 52-week lows.

That's surprising because the weak share prices are so out of sync with current oil prices. Benchmark West Texas Intermediate is selling for almost $90 a barrel and the European Brent benchmark above $110 a barrel.

As well, the senior companies that also own refineries - Suncor Energy Inc (SU.TO: Quote), Cenovus Energy Inc (CVE.TO: Quote), Imperial Oil Ltd (IMO.TO: Quote) and Husky Energy Inc (HSE.TO: Quote) - are enjoying high margins on gasoline and other refined products. Cenovus said recently it was making $40 a barrel on sales of refined products in the U.S. Midwest.

The stocks are pretty insanely valued right now versus the commodity, said Andrew Potter, an analyst at CIBC World Markets. The stocks are discounted to about an $80 oil price, while the (forward) strip is for $90 plus for multiple years out.

Analysts say the share prices of the Canadian senior oil companies are reflecting the risk that oil prices could plunge should Western economies dive back into recession.

Concerns that Greece could default and spark a new credit crisis, along with worry about the weak U.S. economy, have plagued the market for weeks. Though policymakers and central banks have taken steps to ease concerns, investors in the energy sector are not yet ready to gamble on their success.

Who knows how this plays out? said George Toriola, an analyst at UBS Securities. The macro (economic) situation has to resolve itself. If Europe is all good from here then hopefully demand can stay healthy, but if not, then there is a risk to demand.

Other factors may have contributed to the pessimistic view of oil stocks. The impending resurgence of Libyan oil exports as that country's civil war winds down could dampen Brent oil prices, for instance.

As well, economic weakness persuaded the International Energy Agency to lower its estimate of global oil demand growth earlier this week. The agency trimmed its 2011 forecast by 160,000 barrels per day to 1.04 million bpd and its 2012 demand growth estimate by 190,000 bpd to 1.42 million bpd.

Still, even with these factors in mind, analysts consider Canadian oil shares undervalued.

Based on where where they usually trade versus (oil futures prices), the big-cap stocks are anywhere between 10 and 20 percent undervalued, said Michael Dunn, an analyst at FirstEnergy Capital.

The malaise might not end soon. Should European debt remain a concern, there might be little impetus for a rise in oil sector stocks until third-quarter earnings start to be released in late October.

When we see some of those numbers come out, especially for (companies) with strong downstream numbers, people may be surprised at what kind of earnings and cash flow get posted, Potter said. That might be a bit of an awakening for some.

Canada Energy