Hopefully the compression leak is inconsequential. I'd try a new heat shield for that injector (one per injector) -

http://catalog.peachparts.com/ShopByVehicle.epc?q=1987-Mercedes--Benz-300td-Diesel--Injection&yearid=1987@@1987&makeid=63@@MERCEDES+BENZ@@X&modelid=6235:MBC|1519:ED|10000096@@300TD&catid=240706@@Diesel+Injection&subcatid=240710@@Injector+Heat+Shield&mode=PA

If it's conclusive that cutting fuel to each cylinder didn't affect smoking, the smoke must be caused by an oil leak downstream of the combustion chambers. Each exhaust valve stem has a seal keeping engine oil from the head from seeping into the exhaust stream. The valve guide does most of the work serving also as a bushing to guide the path of the valve. The valve stem seal does the rest. There's also a seal between the bearing section of the turbo and the turbine section driven by exhaust gas. When that seal goes, oil leaks from the bearing section to the very hot turbine section and out the exhaust pipe.

We don't have conclusive evidence at this point so we're doing cheap diagnostics. I'd remove the pipe that connects the exhaust manifold collector and turbo. IIRC it's 2 nuts at the collector and 4 nuts above the turbo. All take a 13mm socket. It might take some blows with a soft mallet to release the connector pipe. If the inside of the collector pipe is coated with wet oil, the oil is coming from the engine. If it's dry, however sooty it may be, it's likely an oil leak within the turbo. You can idle the engine with the connector pipe off. Just be sure nothing falls into the turbo! Cover your ears then see if the same smoke you see out the tailpipe is coming from the engine upstream of the turbo. It'll be loud!

Sixto
87 300D