Well I think oil should be a liquid like water in its normal state, but once it gets in contact with any fire from whatever source, the oil that has empty space next to it should burn up and become heated. This burning should not happen too quickly thou, since it would require empty space (=air) to continue. Burning should consume 1/7 Oil per tile per X moves, dunno how much would be realistic.
Theres a lot still to address here thou:
There is no mixing liquids right now I think, but mixing oil and waterr should create a 4th liquid called oily water or whatever, wich should burn when exposed to fire and be deadly to whoever drinks/swims in it.
Tied in to that is the question what will happen if water is used to put out a oil fire. I think the water should be consumed and be turned into a lot of steam and smoke. I am unsure what magma poured in should do thou besides start a fire. It would make no sense for it to vanish.
Adding oil without the ability to use heat in more ways seems a waste. There should be more stuff, for example heating water for bathes, heating oil for sige defense, sige engine ammo that burns, oil lamps, the works.
One would also realistically need to be able to assign barrels to be for either food use or oil use because even dwarves are unliely to survive drinking or eating food from barrles that used to contain oil.