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Draining the water at that point could create a future oil leak point if the system failed. Recycling it back into the water tank might lead to burning oil, but that's probably safer than allowing the removed water to drip and it'd be easier to troubleshoot should you ever start burning oil. It would only need to pump water into the water tank when it reaches a certain point, automating that process sounds do-able. Shutting that outlet down when not needed or using a one way valve cuts down on any possible other issues.
I think we're talking about a system that has use outside of allowing us to inject water into the combustion chamber. Maybe there is already one being used in such an application. I'm still not sure of how your system work either. Dry sumps are outside my range of understanding right now.
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-Allch Chcar
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