so, over the winter and prior, i have my saw covered with a tarp. i was noticing that there is water in the oil as i opened the cover after a cut.
Not really worried right this second, but i get to experience the pleasure of seperating the water from my expensive oil soon. 
This is an old post to be replying to but I discovered water is no issue unless it sits in a spot that will rust out; for me there does not seem to be any other issues than that. (Rust)
Anyhow, I use water to clean my sludge and oil; I have a 15 gallon plastic barrel with the top cut off. I would put five to ten gallon of water it then from my saw, I would put all my sludge and dirty oil in it and then I would use a paint mixer blinder attached to a power drill and run that for about 5 to 10 minutes stirring up the sludge, water and oil.
After that I would let it sit in the sun all day covered with a towel until I get home and by then the oil would be so clean floating on top you cannot tell it was ever used. So now, on a sunny day I would even hose out my saw during cleaning and place the runoff in my barrel. Sometime before I even drain my saw or put water in my barrel I would hose the inside first knocking off the top sludge and then drain it.
I use a small pump with oil and waterproof seals to pump the oil back to my storage drum or saw. The pump is similar to a water fountain pump in a birdbath.
I don’t think this will work with water-soluble oils not sure because I use cutting oil from shell (Pella A mineral oil) and water is a great way to clean the oil using the settling process. Oh yeah I also have a valve installed near the bottom to drain some of the water off if and when needed. Also the barrel is white and I can see the separated levels in it. Sludge, water, and yeah clean recovered oil.
Cheers