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Right click on the game and open properties.
In the general section it says Enable the Steam Overlay while ingame. It used to say Enable Steam Community ingame.
I am not sure how else to resolve the problem. I vaguely recall an old launcher being available that made it work, but I no longer recall where to get it. I think it was the version created by a Valve employee.
It works very fine most case.
OBSE is COMPATIBLE with Steam Overlay!
steam>settings>In Game> []check box Steam overlay : check checkbox
To know Steam overlay is active kick Oblivion and In the Game SHIFT+TAB
If overlay window appears you successfully set Steam Overlay active.
2)OBSE
Where did you download OBSE?
http://obse.silverlock.org/ is the URL to download OBSE
(do not try other place)
Then put ..steamapps>common>oblivion folder "obse_steam_loader.dll" and "obse_1_2_416.dll".
If you use construction set, place "obse_editor_1_2.dll" either.
And create OBSE folder in Data Folder and Plugin folder under data/OBSE folder if you have any plugin dll already.
To know OBSE works or not just kick Game after OBSE installed.
Then exit game and see OBSE.log file in Oblivion folder.