Water is a consumable item that reduces the sanity cost of travelling on desert terrain from 10 to 5 (on Normal difficulty). One unit is automatically used for every hex of desert crossed.
Water is rarely used outside of Desert worlds, but having even a small amount on-hand can be prudent. Other biomes can spawn small sections of desert in Expeditions 4, 5,and 6. In addition, a certain shrine curse creates an expanding desert that can spawn even in Arctic worlds.
The player can obtain unlimited water for free from the Ship, though current water inventory is capped at 5 stacks. Oases similarly allow for virtually limitless refills on water.