Currently youtube Android app doesn't support creating play lists out of your downloaded videos for offline viewing.
The best deal that you've at the moment is simply creating the playlist with your desired video while you're online (connected to internet) and then follow these steps:
- Create the playlist of your favorite videos when you are online and connected to internet. Give it a name. I named my playlist "My Favorites".
- Now go to Library tab in the Android app.
- On the new screen, check the section named
Playlists (A-Z)
. You will see your playlist enlisted there. Click on the name of your playlist.
- Now on the new screen simply click the download button (downward facing arrow icon) at the top of the screen as shown in the below screenshot.

It gives a warning - Downloading playlists may require significant time and storage.
. Just press ok on this warning popup.

This warning isn't much of a worry.The download time totally depends on the number of videos you've in your playlist and your broadband connection. Prefer to try this option when you're on a Wi-Fi connection to avoid wasting your cellular data.
These four steps will download the entire playlist as a new folder which is available offline even when you are not connected to the internet.
Note: If you had downloaded your favorite videos already for offline viewing then the same set of videos are now present at two places on your device, one under downloads folder and also inside the new folder named with your playlist. But the catch here is that file on disk is same i.e. they are not two copies of the same video, so don't delete it from either of the lists or it will delete it from both the playlists. The playlist will remain intact but videos will get deleted. If you happen to do so then you will have to initiate the download again from your playlist view.