I live in a humid location, and condensation in my compressor is a major problem, I don't paint with it but I hate water in my tank cause its bad for the compressor tank, and I don't like the combo air and water coming out the end of my hose.
I have an up-right tank with at drain valve at the bottom. That little piece of sh-- (POS) valve was always sticking and if It did open, it would not let the crap out and would plug up. So I bought a 90 degree fitting and a brass nipple long enough to bring the valve to the side of the tank, it is still the lowest part of the tank, I bought a small ball valve to use as a drain valve. It works like a charm. When I'm using the compressor a lot, I just crack that valve just a little and leave it cracked to let the condensation out.
I'm not a big fan of harbor freight, but I saw what looked like a good water and oil separator for compressors over there. Its worth a look! But I cant see why you have oil problems with your compressor unless you have just worn it out!