Muffling an oar means wrapping something (usually cloth, or in olden days, perhaps animal skins) around the oars where they come in contact with the oarlocks, in order to deaden the sounds of oar and oarlock scraping as you row.
You hear about muffled oars all the time in adventure stories; I went through over 15 years worth of smugglers, pirates, and Swallows and Amazons without actually knowing what this meant. I knew that you wrapped the oars -- but I had always assumed that the 'oar' was specifically the part that you put into the water. I wasn't until today that I actually came across a passage that described the process in enough detail to clarify things... I must admit, this makes much more sense.