First, nice car. The 300 SEL is a solid machine. Not much power, but enough to get around. Surprise me that MB does not put the 3.0 L engines in the S-Class anymore.
I'm no guru, but I think that your hunch is correct. Same thing happened to my 87 Camaro a while back. Once the sensor was replaced, no more light. My O2 sensor was on the exhaust pipe downstream of the exhaust manafold.
'89 420 SEL
'90 300 SEL
'68 Olds 88 Convertible
'84 300 SD (sold it)