As you indicated, the guage is probably working. My first step would be to drop the pan. I did that on my 89 420 SEL and found the tower, from the bottom of the oil pan to the pump, had broken. It is made of rubber, but was rock hard and brittle. There were a few other partsin the pan too, like part of broken rail, which blocked part of the inlet. My pan was dented, so it explains why the tower was broken.

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1989 420 SEL