Don't get confused by the term "Scratch Disk". It's not some mysterious extra hard drive hidden on your computer. It simply refers to the amount of free space on your hard drive; and it sounds very much like you don't have enough free space.
Right. So that's why you don't want to convert file to PSD unnecessarily. Stick with "original".
To help me sleep better tonight, can you please do this check?
Well, not perfectly smooth, but yes, I think we could improve it.
Go ahead and do your raw processing, then post it again and we'll talk about our options.
That was actually one of the very last layers I added. After all the gradient ones, I went back and put that in there, then fiddled with the sliders to make the area match the new background.