Steel is a metalic alloy that consists mainly of iron and shares most of its features. While wrought iron typically consists of less than a half percent carbon, in steel the percentage is around one and a half percent carbon. With the increased carbon, steel is harder and has a much higher tensile strength that iron, but also more brittle. The first steels were probably created accidentally when the iron sword blanks were heated in charcoal forges. The original Japanese samurai steel sword blades (katanas) were not steel as such, but a layered composite of wrought iron, and carbon which when worked created boundry layers of steel. Damascus steel, which was famous in ancient times for its flexibitity, was created from a number of different materials (some only in miniscule traces), essentially a complicated alloy with iron as main component.
While the ferrite allotrope of iron, which is normally what we see as wrought iron will not absorb much carbon, when heated to a higher temperature, it becomes austenite which is then capable of combining with carbon to form steel. Additional metals are usually added to carbon steel to change its charatistics. Nickel in steel adds to the tensle strength, Chromium increases the hardness, Vanadium also increases the hardness, while reducing the effects of metal fatigue.
After the heating process, the cooling of the steel must be controlled in order to control the crystal form of the steel. This is known as quenching. The steel must be cooled quickly in order to achieve the desired crystal form, but cooling too quickly will cause the metal to crack. Water cools the steel too quickly, and thus oil is traditionally used.