Whilst most colored pencils are wax based, some brands use an oil based lead, like Faber Castell's Polychromos. These pencils are very soft to apply color so will cover every fibre of the paper with their bright hues, but they are also very expensive and should only be considered if you are looking to take your art to the highest level.
There are lots of ways to tint your fabric for embroidery, with the most common being crayon tinting. In this post, you'll learn a few methods to try. With all of these versions of tinting, it's best to add the color before you start stitching. While it's possible to add the tinting after your embroidery is finished, it's much harder to color all the way up to the lines and without getting markings on your thread.