Well, different compressors have different instructions regarding the use of sight glasses. Some say to have the resting oil level in the middle of the glass, while some say to have it at the top, so I would suggest first referring to your instruction manual. Either way, the oil level will always appear to drop significantly when it is running, since there will be oil splashing all over the top end.
The same thing happens in a car. If you check the dip stick while it is running (this is probably a bad idea though for a few reasons), you would see that the oil level is much lower. At the generator at my work, the dip sticks actually have two range marks. On one side, is the range where the oil level should be while off, and on the opposite side is the lower range where the oil should be while running. But aside from generators designed for continuous use, not many machines figure users will be adding oil while the machine is running.
