As the final piece of advice that I'll give on this (and I apologize in advance for its length), first let me lead off with a little about myself. I'm a manager now, so dealing with interpersonal issues is part and parcel of my job, but many years ago when I started at my company I was in customer service (and still am, to a much lesser degree). Back before I was in management, my responsibilities would be in supporting between three and five clients at a time, and generally we'd support the same clients for years at a time.
Now, my very first client was, on the face, terrible luck for me to have been assigned to. They were argumentative, they ignored virtually every recommendation we made, and they bitterly complained when they ran into the very pitfalls we tried to steer them away from. My predecessor was fired, and I took over at a substantial disadvantage. They didn't even know me, but they disliked my predecessor, they disliked my company, and by extension they disliked me. They were very seriously considering ending our contract and walking away, even though they would have incurred a substantial cost to do so.
Given such a terrible situation, it was clear from the outset that I couldn't win any arguments with them. Persuading their CEO and other executives wouldn't happen by arguing with them, no matter how great my argument was - they simply would not listen. So I took a different approach.
When I gave them recommendations on some area, I'd test the waters to see how strongly they felt on each point. Without arguing, I discussed the pros and cons of each point and listened to see how strongly they felt. After the meeting ended, I would go to my notes and divide our points of difference into points that they were willing to compromise on, and points they were unwilling to compromise on. I'd also note down the points on which we agreed.
I then tried to come up with the best possible overall solution assuming they got their way on every point they were unwilling to compromise on. As long as I could come up with a proposal that was at least adequate, that became my second proposal to them. I made sure to be clear what the drawbacks would be compared to my first proposal, but then I also presented my best plans for how to deal with those drawbacks. I also tried to emphasize our points of agreement whenever I could, so that they they saw we were working towards a common goal.
Above all, my strategy was to build a rapport with the customer. As long as they saw me as an outsider or an adversary, they never really listened to me or trusted me. I needed to build a common ground to start from, and early on I needed to make many concessions to accomplish this. As time went on, however, they came to accept me and later to like me very much. While I've moved on to management and don't normally do customer work anymore, they are the one customer I've retained, because they are very vocal that I need to remain "on their team", and they won't accept another. Nowadays they follow my recommendations almost to the letter, and they are very happy with my company and our product.
Now, there's no easy recipe for success. My own accomplishments with this client were built slowly and painstakingly over several years, they certainly didn't happen overnight nor were they easy, and I think that will be true in your situation as well. But still, I'd approach this problem like this:
A) If this item hadn't existed at all, would you be absolutely guaranteed to lose the campaign? If the answer is 'no', then you have at least some room to be flexible on this point. It may well be better off in your hands, I won't argue that, but it's not a guaranteed loss if you had to give it up. You still can be successful without it.
B) It seems she's absolutely unwilling to compromise on the sword ownership, but she does seem willing to compromise on character build (feats, etc.). What is the best possible scenario you can come up with GIVEN that she gets the sword? If she was to have the sword, what steps does she need to take to ensure she uses it as best she is capable and does the best for the party and for herself? That's the compromise plan I would take, and the plan I would present to her. Again, you need to consider what's best not just from a game mechanics point of view, but from the point of view of your oracle enjoying the game and enjoying her role on your team.
You cannot win someone to your point of view while the argument endures. That seems counter-intuitive at first, but argument is the least effective form of persuasion. First, do what it takes to end the argument, and only then can you make progress on trying to win them over. Argument isn't a path to success, it's in fact a roadblock to success. You won't make progress until you get the roadblock out of the way.
C) Over time, I'd work at simply building rapport with her. Remember - nobody sees themselves as wrong in their own eyes. You have reasons for what you do, and they make complete sense to you. She has reasons for what she does, and they make complete sense to her. Build a common ground to work from, and even if you do lose this sword this time, consider it an investment into a better relationship with your fellow player. When you've built a common ground, not only will you be able to see her point of view, she'll be able to see yours, and over time the sense of teamwork will pay off for both of you. Having shown her that you are willing to compromise this time will make her more likely to compromise in the future. Think of it as a short-term sacrifice for a long-term gain.
Plus, most importantly, you and she will have more fun playing a game where you can work together rather than being at each others' throats. After all, isn't the pursuit of fun the very reason that everyone first came to that table? This argument is killing that fun, not just for you and her, but for everyone else as well.
