The second and fourth options are obviously wrong because there's a verb missing. Of the two which are grammatically correct, I'd choose number 1. You need the comma, because the second half of the sentence is merely additional information. Compare your sentence with "He lives in a British city which is famous for its university" . This sentence requires no comma. This is because the relative clause is an essential part of the complement of the sentence. And on the subject of punctuation, don't believe anyone - native speaker or not - who tells you that you need an apostrophe in 'its'.

Definitely not options 2 and 4 - you need to have a verb after which, as 'which' stands for the nearest noun (Oxford here). And you cannot have a noun without a verb. As for the usage of comma in options 1 and 3 - Use WHICH (and commas) if the modifier is non-essential. For this sentence it's not essential information that the person living in Oxford also lives in the city famous for its university. Hence, #1 option is the best one here)

I would say number 3, without the comma. A comma usually denotes a pause in speaking. Try either sentence out loud. it will help. You usually use a comma before which if the sentence is broken up into parts. "He lives in Oxford, which is famous for its university, and finds the rent expensive." is an example. If you take the commas out and read it aloud it makes little sense, but add a slight pause and it does. Also if you remove the 'which is famous for its university' out, the sentence still makes sense. 'He lives in Oxford and finds the rent expensive.' I hope that helps.

#1