Please beware that coalescing filters (the water & oil trap you and others are referring to) ONLY remove condensed water from the air stream. They can not remove water vapor from the compressed air (which is usually the greater problem), as a result you will still get a good deal of condensing water at the point of use on humid days and especially during periods where the compressor has run continuously for more than a minute or two (oilless especially, as they run even hotter and hot air holds more moisture).
This is especially problematic if you use the air to blow/dust your cast iron surfaces or for painting. Even in a dehumidified air-conditioned workshop, sustained dusting or cleaning with a blower attachment will eventially generate enough heat at the compressor and tank that the now hot compressed air will actually begin to produce a continuous, and often times readily visible, stream of condensing water/steam at the outlet of the blower due to the sudden cooling experienced when the compressed air returns to normal atmospheric pressure!
This issue is typically dealt with in one of four ways:
- A long run (20+ ft, more is better) of steel/iron or copper piping (NEVER PVC) installed before the water trap, which serves to cool the air before it reaches the water & oil trap. The water condenses in the piping, the air cools which reduces it's moisture holding ability, and allows the coalescing filter to trap far more water greatly reducing the dew point of the compressed air. If the dew point is below the temperature of the cooled compressed air (the air stream cools further at point of use when the pressure is suddenly reduced) then no water will condense in/on your tools. However, you can not count on a water trap to guarantee no water condenses at the point of use.
- Installation of an aftercooler for the compressor (essentially a fan-driven radiator) installed between the compressor pump and tank (not practical for a pancake). This performs the same function as the metal piping in solution #1. Again, this greatly reduces the water vapor stored in the compressed air stream and allows for greater capture of the water (in this case at or before the tank), but does not guarantee that no water will condense at the point of use.
- Install a coalescing filter wherever you can to trap what liquid water there is, then install a dessicant (silca gel) filter just before the tool or point of use. These work great, but disposables cost money over time and have a limited life before saturation. The more water vapor there is to remove the shorter the disposable's lifespan, so it pays to condense and remove as much water as possible beforehand. More permanent dessicant filter solutions with renewable dessicant (either manually or automatically renewed) are available but fairly costly.
- Installation of a refrigerated dryer (essentially a dehumidifier for your compressor). Typically a hot-air dryer is installed between compressor pump and tank, but for a pancake it could also be placed after the tank without issue. This is the absolute best solution for water removal but it is also the most costly. Fortunately, a pancake compressor can get by with the smallest unit available.
HTH