Olivenza is a town near the border of Portugal and Spain. Spain controls it but Portugal does not recognize it as Spanish. Unlike other disputes around the world such as Gibraltar in Spain vs UK, it does not seem to be brought up nor does it sour relations between the two countries. Why is this? Is it because it is of less significance than others due to both countries being in Schengen, EU and NATO?
It is very difficult to look at a real world event, with the tons of factors influencing them, and to cathegorically decide which are the important ones, so any answer might be very opinated.
So I will just throw some ideas. Of course, some of those could apply to other situations, so take with a grain of salt.
The more powerful country won, and the balance of power did not shift much. So the party that was likely to challenge the status quo was in a weak position to do so. Compare with the Finnish or Polish territories lost to the Soviet Union.
Foreign powers were not decisively behind any of the side in opposition to the other. Yes Franco's Spain was more pro-Germany than Portugal, but it remained neutral (and it is not as if the UK had fully supported the Spanish Republic). When the USA became the dominant power, it was equally pleased by the anti-communist of Franco than with that of Salazar.
The issue is several centuries old. No living people, not even their grandfathers, were born in Portuguese Olivenza.
In addition to that, the change happened at a time in which the modern state-nation was relatively young, and many countries very decentraliced. Culture would have been less uniform then, probably with more differences between a Portuguese from Lisbon and an inhabitant to Olivenza, that between that same person from Olivenza and someone just across the Spanish border.
Compare that with enclaves (e.g. Gibraltar, or Ceuta o Melilla) where there is no continuity. There you have a culture that is very influenced by the mainland, in contrast with the surrounding areas.
Apart from the language (which are both Latin), the culture from both nations was not that different. E.g. Catholicism. And to prove that, the historical evolution of both countries was somewhat similar(*).
Both of the above would have made it easy for the Portuguese population to integrate in Spain. No religious discrimination. No people being forced to learn another language at school, because few of them would have been schooled anyway...
The territory has no great economical or strategical significance (compare that to Gibraltar).
In the last centuries, both Portugal and Spain have been very busy with internal strife, trying to keep a colonial empire, and avoiding getting involved in events that were too dangerous for them (like the World Wars).
Maybe this is because public of Portugal does not believe that Spain is going to seriously infringe on the rights of this town citizens, so this becomes an administrative objection.
A similar example is Yugoslavia with its pair of Montenegro and Kosovo. Serbia does not recognize Kosovo's independence but (surprisingly?) it did not seriously object against Montenegro's independence. The reason as I see it is that people of Montenegro are on good terms with people of Serbia, so Montenegro will not going to make lives of Serbs there miserable; whereas their history with Kosovo/Albanians is bitter and they expect that Serb communities living there would eventually be expelled or forcibly assimilated.
Important points that other answers missed could be:
Border seems to be reasonable - Looking at the map, border is defined by the river. So pretty standard separation of states. If border would be defined differently it could raise different disputes as to where exactly border should be. As @phoog pointed out river border can be also source of disputes but that depend on geological features of the area and how much humanity stabilize the river bed. River still flows through the bridge for the last 500 years there and it is more than 10km of Olivenza center.
Common people do not care because of Schengen Area. With the ability to cross the border without any issues nobody really cares. For example Rajka is village in Hungary with hungarian nationality as majority but with Slovak speaking majority. Many Slovak citizens are living there because of cheap housing, while working in Slovakia.
There is basically no claim of Portugal based on nationality of Olivenza citizens. According to wikipedia "In the beginning of 2018, the number of residents with Portuguese nationality is around 800 (6% of the town's population)".