The resolution power of an objective lens depends on its numerical aperture, which in turn depends on the refractive index of the medium between the specimen and the objective lens.
A higher refractive index means the lens can gather more light and deliver a better image intensity. Air has a relatively low refractive index, and when it is the medium between specimen and the lens, lower N.A. objectives perform at their best capacity. Higher N.A. objectives need a higher refractive index to operate and immersion oil provides that higher index. For optimum performance, you will also need to oil the top lens of the condenser to the bottom of the specimen slide. Immersion objectives are marked "oil".
Objectives marked "water", require water as the immersion contact medium.
Oil immersion is used with high power objective lens (usually 100X) as a medium between the lens and the cover slip. Because oil has the same light transmitting properties as glass, it cuts down the refraction of light rays. Other requirements include the use of a 1.25 Abbe condenser to be used.
Such an objective is an immersion objective, requiring a drop of immersion oil (or water) between the front lens of the objective in contact with the cover glass or top of a smear. Unless there is oil contact with such an objective, the image will be very poor. Some manufacturers inscribe a black ring on the lower part of the barrel to enable the user to instantly recognize the need for oil contact. Similarly, the letters water refer to an objective that requires water, rather than oil, as the immersion contact medium. To achieve a numerical aperture of 1.0 or above requires an immersion objective.

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