Flight Instructor reported low oil pressure; loss of power; and rough running engine required a return to the departure airport.

Narrative

While conducting the RNAV XY in to ZZZ1 a low oil pressure annunciation showed up; pressure was reading 54-55 PSI. Oil temperature was normal. After running the low oil pressure checklist and monitoring oil pressure it jumped back up to 75 PSI; a much normal reading. Oil temperatures remained normal. I had up my mind to write up a discrepancy for a possible faulty sensor. I continued to monitor oil pressure and temperatures; they were nothing out of the ordinary throughout the rest of the flight. Getting vectors back to the LOC XXR in to ZZZ the engine lost a significant amount of power while also rattling the entire airplane. I took controls and had the student run the checklist. Oil pressure and temperature still looked to be in the green; but cylinder temp #2 was barely at 250F; indicating its failure. I [requested priority handling] and started setting up for a potential off-field landing. In the meantime; the engine also started to smell like avgas signifying that there could potentially be fuel leaking; making me concerned of a fire while also a having an already bad engine. We landed in ZZZ with no further incident. Found a streak of oil along the left side of the cowling on post flight. While rare; it is not normal for parts of the engine to run rough. The #2 cylinder stopped firing. Preflight inspection of the power plant reveled nothing out of the ordinary. Maintenance does a fantastic job at the school; parts break some times. It is up to us as pilots (CFIs and students) to assume risk and mitigate them as we fly. Best we can do is fly the airplane; communicate our intentions; follow the checklist and trust our training.