Oil is certainly circulating outside the engine block - otherwise the valves/valve springs, cam shafts (head) etc.. would not get circulating oil which would result it quick failure of those components.
Typically coolant temperature is taken at the head, and since it is controlled via thermostat it shows operating temp quickly. If it was measured at the outlet of the radiator, it would be much cooler. The difference is that all of the oil is being moved, whereas with the coolant, only the coolant in the engine is being moved until the thermostat opens. Oil is always drawn up from the pan and delivered back to the pan.
On my 1991 MR2 turbo, I measure oil temperature in the pan - it takes a long while before that sensor comes up to 160 degrees. The highest oil temp I've seen on that car is 260 degrees.
-Joe
http://www.lovehorsepower.com