If it smells of gas and the oil is thin, it's probably gas. Water doesn't mix well with oil, it tends to form sludge. It often shows up on the fill cap and looks almost like a chocolate milkshake.
Gas in the oil is very often a sign of extremely rich mixture at idle. It doesn't burn completely and coats the cylinder bore walls and gets past the rings. You should address it ASAP because the degraded oil will cause excessive wear throughout the engine.
There are other paths for fuel to get into the crankcase, but in my experience this is most likely. I'm not all that familiar with the Pagoda engine design, but it seems most of the fuel system is external to the engine, so a leak is more likely to be in the engine compartment.
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