Cassie paid a male dancer to have sex with her while Diddy watched and Diddy told them they didn't have enough baby oil on their bodies ... at least according to the dancer's court testimony.

The prosecution's second witness in Diddy's sex trafficking trial Monday was a male dancer who said Cassie paid him thousands of dollars to have sex with her on multiple occasions at different locations, all while Diddy watched and directed the erotic sessions.

The dancer told the jury he and Cassie used baby oil every time they had sex. He also testified Diddy once complained about a lack of baby oil ... telling them to slow down and separate.

It's the first mention of baby oil from witnesses ... as you know, the feds say they seized 1,000 bottles of baby oil from a raid on Diddy's home.

Diddy tried to have Cassie and the male dancer role-play, he testified, telling them to pretend they had just met at an airport.

The first time the male dancer was hired, he says Cassie was in a hotel room with a red wig, stockings and sunglasses ... and Diddy was there with a white robe, a bandana covering his face and a baseball cap ... with the man's voice giving him away as Diddy.