keeveek: The best thing is when they manage to combine both, but I agree with you, this "environmental storytelling" is pretty impressive in Oblivion.
amok: which also made Oblivion very immersive, in my opinion. :)
It makes you much more discover things, places and stories. You are exploring. Not just told to go there because a NPC in some storyline tells you to go there and what you will find.
In this regard Oblivion is better than Skyrim, actually.
edit - having considered a little I retract the last statement, Skyrim does just as well as Oblivion. :)
^^^ this. I really did enjoy Oblivion, Fallout 3, Morrowind... but I'm having trouble starting Skyrim, not sure why though. But for whatever reason, despite the hiccups here and there, I really did enjoy the way the games FELT. Maybe its just because that's how I tend to play games ("no stone unturned"), but I love games that just let you wander around and explore. Hell, I do that in World of Warcraft just to see whats out there. Sometimes nothing, sometimes a goofy pop culture reference, sometimes its just an out of the way bit of architecture...but its still fun just to go LOOK, you know?