There was a very recent thread, "Question about wipe-on/brush-on finishes" in which I shared my thoughts on oil penetration. Here, I'll just cut and paste what I said:
"...about the issue of finish penetration... that is an interesting issue and one to pay some attention to. Finishes are often described as being either film finishes or penetrating finishes. As I see it, it's a bit of a false distinction. A lot of it just has to do with viscosity -- any finish that's runny enough, i.e. thinned with enough solvent, will penetrate. Pure oil finishes will tend to penetrate more even at thicker viscosities, if you flood the surface and let it sit on there a while before wiping it off. But even oil finishes, if they're "finishes" at all, i.e. oils that will cure, form a film on the surface.
You don't want a finish to penetrate very much on a guitar. So if you use a wipe-on finish that penetrates a lot, you want to wipe it off quickly so very little soaks in, then let that coat cure. You've now got a very thin film on the surface. Each succeeding coat will penetrate less because the surface is more and more sealed with the film you're building.
A bit of penetration can be a good thing. E.g. with an oil finish, that's part of how it pops the grain nicely and looks the way it does.
You can also reduce penetration of any finish by wiping on some shellac first. This will give a different look, but it can be an effective technique. Shellac goes on as thin as water, but because you don't flood the surface with it, and because the alcohol evaporates almost instantly, it doesn't tend to penetrate very much. And it seals the wood well."
I wouldn't recommend pure tung oil. "Danish Oil" could mean a lot of different things... probably not your best bet, either. Tru-oil may be the best option if you want to go with oil. Many people are using that successfully. Search the archives for that as well and you'll find some good tutorials on different methods. A wipe-on varnish like Minwax wipe-on poly might work great for you, and would likely be more durable than any oil finish or shellac (shellac hardens over time, but can be easily damaged for the first year or so -- but is also easily repaired as Michael said).
Note that most "oil" finishes, including Tru-oil, contain solvents -- probably just mineral spirits, so we're not talking major toxicity, but still not stuff you want to breathe too much. If you mix your shellac with drinkable grain alcohol (rather than denatured), FP is about as non-toxic as you can get.
There's an oil finish called Tried and True that is totally non-toxic (no solvents or other additives), and it's a valid option (just don't let it penetrate much), but it will not be a very hard, durable finish (probably more fragile than Tru-oil), nor can it be given a high-gloss sheen, if that's what you want.
In general, any wipe-on finish (oils, wiping varnishes, FP, etc) will result in an extremely thin film, which is good for sound. So, I wouldn't let fears about penetration stop me from using something; as long as you prevent it from penetrating much, you'll end up with a finish that's as good for sound as anything.
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