Oil is a status effect in Dark Souls II.
General information
Oil causes the player to turn jet black. If the player takes any fire damage or tries to light a torch or switch to a pyromancy flame while covered in oil, they will explode dealing high fire damage to themselves and anything nearby, including friendly players.
Defense
Once the player has been drenched in oil they must simply wait until it dissipates. The amount of time the player must wait is represented by how much black is on their character, which slowly drains from top to bottom.
If the player goes into any body of water, oil will be instantly removed.
Sources
The following enemies can inflict oil:
There are also urns filled with oil. These are found in No-man's Wharf and the Undead Crypt.