Oil or water should be fine - although oil possibly better. Make sure to cover everything over that isn't protected, exposed suspension parts, windscreen frame etc. The wet oil/Ali mix is a pig to remove once dried. 2000 will be plenty far enough, in fact you can skip sanding altogether depending on what you're compounding with. Don't worry about the swirl marks, they will be removed through compounding. What are you compounding with? And do you have a cyclo for finishing with grade S? Olly