Your photo is cornfusing, to say the least! Just what don't you understand about a water drain in the compressor air tank?
And, how do you think the water is getting into the tank?
Sheesh! Maybe the air gremlins are pi--ing in the tank when they slide thru, going from the compressoir to the rubber hose/ air line?!
Another thing: If you are finding oil or grease in the air hose and tank, and eventually in what you are working on--there are two solutions: Either rebuild the pump, or buy a whole new compressor, and sell the old one at the flea market, or scrap it! The one in the picture looks older than me, and i am older than dirt! 88 next week!
It is very difficult to remove an oily residue from the inside of the air tank, since you must use a special detergent, then shake the tank over yer head for a spell, then flush it out, do it again, then scrap the tank and buy a new one! Helpful hints from: Rusty Jones

Rusty, My goal was to share an idea that will help me drain my air compressor more to protect the tank.

1. The compressor might look confusing because it's tilted to show the fitting with one wheel off.

2. Water gets in the tank from condensation during the air compressing process.

3. There is a line filter to help remove moisture and etc before the air enters the line.

4. The oil in the water in the tank, "I feel is normal", since from new and rings c/n stop all.

5. "I Love This Compressor". LOL! With spare original parts to Keep This Monster Going.

Have A Good Day And A Happy Birthday Young Man!

If your compressor stands in one place all of the time, then you should run the air line from the compressor, up much higher than the tank, and take your air line from the upper end, or by making a U in the line, then run the drop line down to your air pressure regulator, which should be mounted on the wall, or at least higher than the tank. You should also install a water trap in the bottom of the regulator line, and a petcock to drain it out.

Loger, the oil and water in your tank is not
protecting the tank. The oil floats on top
of the water, so the water is in constant
contact with the bottom of your tank.
A tank like this, at a pressure of 150 PSI,
is a weapon of mass destrucion. If you do
keep it, place it somewhere, so that if it
blows, it won't kill anyone.

Thanks And Good Points! The 40 yr old compressor tank is in a very restricted closet (8' X 6' under a sink's counter and fronted by Stuff, LOL). The 39 yr old pin hold repair o-ring and self-tapping screw are on the bottom. 120 PSI is where it is regulated to shut-off and it's on a 0-12 hr timer vs left on. We experienced a 2,000 lb psi full oxygen bottle to move around in a closet at work from falling and breaking a valve. Which later dictated being chained in the larger closet by the fire codes.

From this closet are hoses to Gal attic plumbing (installed in sections) for flexing up to attic (to rear of house and front and rear of garage). Then back down at ceiling and work-bench (related to Rusty's oil/moister suggestions). This has been a lifetime project and very handy layout. My garage handled the bulk of my projects but the rear Car-Port was best suited for some jobs and dictated a drop. Initially a hose until I heard the leak in this TX heat.