The "sport vs premium" thing, I'd just ignore that. Use what you like. There are differeneces in fuels, but for the most part, most pilots won't notice, and I don't think it will matter all all in your case. What brand are you using?

I still think you're a bit rich. Try starting the engine, then slowly leaning it out until you hear the rpm drop a little. Don't leave it there, richen back up ASAP, just until you hear the RPM come down a little from the max value. See if that helps. Move the needle slowly, needle changes aren't instant, espcially when leaning out an engine. The engine needs time to blow out any excess. For that matter, if you lean it slowly, the surging might just go away as you lean it out. Stop leaning just when the engine holds it's RPM

To lower the compression ratio on an engine, you install additional head shims/gaskets. The engine might or might not have come with them (I bought my ST .75 used, so I don't know what's normally in the box). OS engines run a lower compression ratio than some other makes, btw. (at least they used to, I honestly haven't checked an AX, though I do own a couple of them). You can also cheat a bit by using a shorter plug (not a short, just a shorter one, like an OS #8), or add a 2nd washer under the glow plug. This will lower the compression ratio just a hair. A differnet plug brand might help as well, though I still think you are just too rich.

btw, most all glow two-strokes will show bubbles out of the front bearing if you do that water test. I personally wouldn't bother, but if you really think there's a leak, it might help show where. Also keep in mind that different parts of the engine are blocked off at different times as the crankshaft rotates, so if you do the under water thing, you'll need to rotate the crank as you do it. And be sure to get all the water out, and oil things up, espiecally that front bearing. I personally would want to run the engine for a bit after a dunking to make sure all the water is either blown out or boiled off.

Anyway, the problem will also probably lessen as the engine breaks in, at least it did for the engines I've seen that tended to surge.

Now, it's also possible that your local guy is right, and that you're leaking air, probably around the carb somewhere. This usually doesn't cause surging when the plane is stationary and level, but does cause the needle to be harder to set, and will cause the engine to lean out if the plane is moved at all. However, it can cause erratic things to happen, maybe surging. Usually instead of pulsing up and down in RPM, the engine will "run away" and suddenly leap up in RPM, or leap up then go overly lean and sag or die.

Now, to be totally contridictory, it IS possible that you are also set a little on the lean side. If the engine overheats, cools, then overheats again, you could get an up-and-down pattern, but it's usually slower in happening, since it takes time for the engine to cool off.