Facing the worst industry conditions in 12 years, Exxon and Mobil appear poised to follow British Petroleum and Amoco by merging to slash costs.

Sources close to the parties say that talks between Exxon, currently the world's largest publicly traded oil company, and Mobil, the second largest US oil company are at an advanced stage, and a deal could come as early as next week.

Analysts say that a deal in which Mobil shareholders would receive Exxon stock, would generate cost savings far greater than the $2 billion annual savings being touted by BP and Amoco.

"The only real rationale for these companies is cost savings," said Mr Michael Young, analyst at Deutsche Bank Securities in Boston.

"There are no synergies that point to top line growth."

A raft of mergers in the oil industry, headed by BP-Amoco, has seen Texaco surrender control of its US and European refining and marketing operations in joint ventures with Royal Dutch/Shell Group, and has also seen Mobil form a European venture with BP.

Exxon and Mobil would create an industry giant with a combined market capitalisation of some $240 billion, more than three times the size of BP-Amoco, and one-and-a-half times the size of Royal Dutch.

These deals are key as the industry contemplates another year of low oil prices, an over-abundance of oil supply and weak global demand, analysts say.

Many analysts are projecting that oil prices in 1999 will fail to recover from the 12-year lows hit this year and that, despite production cuts from the Organisation of the Petroleum Exporting Countries (OPEC), weak Asian demand means that the world benchmark Brent blend oil price will remain mired at $12 a barrel.

Even Exxon, whose management is rated the best in the industry, is facing the uncomfortable prospect that earnings in 1998 will fall sharply, to some $6.425 billion from $8.46 billion a year ago.

At Mobil, the decline is expected to be more marked, with analysts projecting earnings will fall to some $2.5 billion this year from $3.43 billion in 1997.

Analysts question, however, whether being second or third in the round of cost cutting is going to help performance relative to the peer group, or just lower the bar.

The fact that cost pressures remain intense is one reason why regulatory interference in deals has been so limited. The industry remains very fragmented, a far cry from when John D. Rockefeller's Standard Oil trust, from which both Exxon and Mobil are descended, controlled 90 per cent of US refining capacity.