Randy, I think you’re right on. The blanket collecting water seemed like a far fetched idea, and yet there it was.
The tank is was installed in 1999 by Sears I believe since it is a Kenmore. We bought the house since.
After gettting a ladderand looking at the top of the heater there was slight moisture from both the inlet and outlet. the top metal covering of the heater allowed moisture accumulate and work its way to the sides of the water heater. After removing the insulating blanket I could feel the sides of the heater and in one spot it was cooler than the rest. By holding my hand there, after about 3-4 minutes I detected a slight vapor like moisture on my hand.
Long story even longer. You are right. the moisture from the supply and outlet connecting points are beginning to show their age. Now the best value for the buck hunt is on. I’ve got to replace.