This is a tough debate for me, as personally I LOVE both games. The graphics, ambience, NPC schedules etc. make Oblivion so appealing, the combat is fun and has resulted in hundreds of hours worth of gameplay. The story is rich - if not slightly linear - I only have a very few, small complaints about the game:
Firstly, my biggest irk with Oblivion is the whole level scaling. I like to play Oblivion primarily on Xbox 360, as i'm a Mac user, and my game does not run on it. This means I don't have access to Mods to fix what seems like a "broken" system. Before I became aware of efficient leveling, I remember getting to around level 25, and getting absolutely obliterated. Furthermore, I hated the fact that all of a sudden everyone was wearing Daedric armor, when it didn't even exist apparently when I stepped out of the sewers! It made me feel like all the progression I had made with my character was not only pointless, but now even bandits, whom I was killing with ease at Level 3, were now a huge challenge for me.
The compass again felt like an immersion breaker. I don't want my hand held to where I have to go. Mark it on my map, that's fine. But I can [censored] read directions and a map, I don't need to be pointed to the thing.
Thirdly, the whole essential NPC's. I liked that sometimes i'd bump into someone who could turn out to be crucial to the main quest in Morrowind. Or that I could find an item that could be essential to a side quest by simply delving into a random dungeon. I made the world feel alive. However, when they magically "appear" as the quest begins, it's not so good.
This brings me on to Morrowind nicely. Of course it's now 8 years old, 4 years older than Oblivion, technology was much less developed so obviously graphics, NPC schedules etc. were much more difficult to create effectively. However, it's depth of Lore and story made up for it. Not only this, there was a greater availability of skills, weapons, variety of armor and guilds to join. The leveling system was spot-on, it was great.
Unfortunately its sparse Combat system made replay-ability slightly less appealing, because once having a character who's strikes land every time, it's frustrating going back to having to take 20 seconds to hit a mud crab.
Overall I probably sway slightly towards Oblivion, though now I play solely for Roleplaying. Hopefully after two commercial successes in Morrowind and Oblivion, Bethesda can find a happy medium between the two to have everyone satisfied with TES:5