"We expect (third quarter) earnings to be significantly lower than in the second quarter," Dan Katzenberg, an oil and gas analyst with Oppenheimer in New York, told Reuters.
Shares for Sunoco tumbled from $86.40 peak in June to $69.95, while other big refiners Tesoro, Marathon and Western Refining have sunk 24 percent, 22.5 percent, and 25 percent, respectively.
"These shares have started to come off in the past few weeks as people are now understanding how much margins have dropped," Katzenberg said.
"And there's a good chance there's going to be a further drop ... in both the stocks prices and margins."
While the slide has been exacerbated by the big slide of the broader equities markets due to the sub-prime mortgage crisis, analysts said further pressure will come with the end of the U.S. summer driving season when gasoline demand wanes.
"It also has to do with a weakening refining environment," said Daniel Vetter of J.P. Morgan. "A refiner's valuation should be a function of long-term sustainable margins."
Vetter said the benchmark crack for the Gulf Coast, West Coast, Midcontinent and East Coast currently averages about $15 per barrel, down from $26 in the second quarter, and should fall further to average $14.25 for the third quarter.
Margins should drop to $10.75 next quarter, he forecast. "We assume reversion to more normal refining margins long-term," Vetter told Reuters.
Oppenheimer's Katzenberg said refiner margins and earnings are likely to be 50 percent lower in the third quarter than last quarter. Credit Suisse forecast a 40 percent drop.
Other analysts believe downside risk in refiners' stocks is limited, given the already sharp drop from the peak.
"With the sector off 20 percent from its highs, margin risks look priced in," Doug Leggate of Citigroup said in a report.
Wild Card: Hurricanes
The biggest margins declines are in the U.S. Gulf Coast and the West Coast, where the bulk of the nation's refineries are situated, Katzenberg said. As refiners returned from spring maintenance, they churned out more oil products such as diesel or gasoline, pushing down prices and profits.
According to the AAA motorist group, U.S. regular gasoline prices have fallen 14 percent to $2.777 a gallon from their spring peak.
"Gasoline pump prices have declined for several weeks and could decline further as more refineries come back from maintenance," Katzenberg said in a research note on Tuesday.
One factor that could alter the weaker margins scenario would be any big disruptions to oil and gas drilling and refining in the U.S. Gulf Coast from any powerful hurricanes, such as the deadly 2005 Hurricane Katrina, he said.
"The hurricanes are definitely a wild card. When Katrina hit, margins hit all-time highs; if we get something like that it would bring margins to near record levels again."