Sounds like the piston rings to me also. It wont seep down with gravity 'cos we're takling about a few thou of an inch gap, not a gaping hole. Under load and cylinder pressure it may force the stuff through the rings.
In any event, if your oil is getting watery then its losing its viscosity and therefore not providing the necessary protection for your engine.
You also said blue/white/grey smoke? Usually blue smoke is oil and the whitish stuff is fuel.