1. Fuel does not displace air.
On the air side, that is all done before the injector even thinks about firing. So all the air that we've done our best job to get into the cylinder is there already.
2. Water does displace air.
Water injection does displace air. You simply do not gain oxygen molecules injecting water. (It is very effective however for maintaining cylinder temperatures for prolonged time's like sled pulling)
Common rails can run very close to max power on very little smoke but cylinder temperatures are un-controlable for the time it takes on a sled.
My max dyno pulls on fuel would top out the egt's at 1900+ degrees. With additional fueling could bring it down to ~ 1650 with very little power penalty.