The 02 should be 6-8" back from the last tube in the header, if you put it in the collector it will read the cylinder it's closest to.
I'm not sure that it is rich, after looking at the pics I suspect the oil it's ingesting from the pcv is what you're seeing on the pistons. You need to address your venting as this can cause a whole host of problems. What pcv vent are you using? Most, if not all of these do not work properly. I put a restricter in the vacuum line to slow the velocity. I would also vent both valve covers to a catch can. The LS engines have horrible windage problems and need a lot of topend ventilation to deal with it. The path you're headed down with a larger stroke is going to make it worse since you're basically installing a bigger fan in the crankcase.
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