Have applied two coats of Varathane natural oil wood finish 'clear #66'. Appears to still need re-coating i.e. dry spots vs high gloss in other areas. The wood is cedar. Is this a problem with the wood or an inherent characteristic of coating cedar wood?

That's the nature of cedar. You aren't really doing anything other than keep it reddish color for a while longer. And maybe help keep mildew off areas that are unable to dry out.
Cedar doesn't really need any protective coat.