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"I read in a recent article that the higher the operating temperature, the lower the oil's saturation point. I thought the correlation was that the saturation point increases as the oil's operating temperature increases. In other words, the warmer the oil, the more dissolved water it can retain. Is this correct?"
As you are probably already aware, water is not a good lubricant. It can be quite detrimental to a machine's surfaces and the lubricant. For example, a bearing can lose three-fourths of its life when 1,000 parts per million of water is present in the oil. As a result, water can increase the rate of wear as well.
The amount of water that is acceptable in oil (and thus acceptable in the machine's exposure) will depend on several factors, including the sensitivity of the machine and the lubricant to water, how long the water remains in the oil, the amount of oil/water interfacial surface area, the mobility of the water within the machine, and how much heat is present in the system. Each of these factors alone has the potential to be significant, but when they are combined, the effects can be severe.
Moisture targets for machines are best optimized by considering the criticality, safety, reliability objectives and overall repair costs. In other words, if your machine is highly critical and you know that the types of metallurgy and oil in use are sensitive to water, you will want a fairly low moisture target.
The saturation point is the maximum amount of dissolved water an oil will hold. It is dependent on temperature. As temperature increases, the saturation point of any given oil will decease at a relatively linear rate, as seen in the graph below.
The amount of dissolved water simply means the water at that concentration is dispersed as single water molecules within the oil. It is usually best to stay within the saturation point when monitoring moisture levels. This is because once the saturation point is exceeded, the moisture in the oil will tend to exist in an emulsified state, which is the most destructive form of water in oil. In this state, the water is in globules suspended throughout the oil.
When there is excessive water contamination, the oil can also experience a state called free water. This typically appears in sump bottoms or low traps zones like nooks and crannies within the machine.