Oil is found abundantly underground in caves on Desert planets as well as in the tar pits on the surface of some desert planets. Oil can be collected after upgrading the Matter Manipulator. Like most liquids, oil flows relatively close to Water and after being picked up, oil can be placed provided that there is a suitable wall behind where it is being placed.
Coming into contact with Oil will inflict the 'Oily' status effect, which will slow the player down and reduce their jump height for a short time. This also affects any Enemies and the like that pass through it. Like all other liquids, even submerging only your feet will apply the status effect to you.