Well, ding ding ding. We have a winner.

Tore down the front end to inspect, the water pump, oil cooler, radiator, etc... thermostat...

And there is NO THERMOSTAT. So that is that. No oil in the water, all my water surfaces dried clean and dry with no residue. I think the sludge was left over from somethig else? It was only present in the reservoir. Buying a thermostat tomorrow, will start diagnosis over from the beginning

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Vehicles:
2002 SLK 230
Gone but not forgotten:
1983 300D
1981 El Camino 'OILBRNR' - 6.2L diesel
OM617 powered '86 F150
1984 BMW 524td
2001 VW Beetle TDI
1994 Sunurban 4x4 6.5L diesel