This is a very interesting thread! I don't have much to add, I use a sponge and water at the moment and don't have a problem with that but don't have anything to compare it too.
All Essential Oils have antiseptic properties so they will probably all be antifungal to some extent but Rosemary Oil and/or Tea Tree would be the ones to select for this - just a few drops in the water you use should work fine.
I never understood the term 'casing' but recently read something that explained that when you wet leather the water mixes with the proteins in the leather to effectively form a glue and this is why the impressions we make are retained. This made me think that 'casing' might be a bastardisation of 'casein'. Presumably anything you can add to your water to improve the glue mix might give you better results. Milk is the obvious one but somehow I don't fancy it!
With regards to water soluable oil, this put me in mind of Aqueous Cream which is a pure cream made of water and petroleum oil, it should be fine on leather as it is meant to go on living skin to soften it. You can get it from most Chemists - a big tub costs a few quid. A small amount of this in water would be an interesting experiment. Any amount of oil should stop the leather drying as quickly and also as the friction between the leather and tools would be reduced you may well see clearer impressions and find it easier to work but too much could be hazardous I guess.
Only the info about essential oils is factual, the rest of this post is spectulation based on a fondness for kitchen chemistry experiments so approach with caution!