During differentiation of embryonic stem cells, chromatin reorganizes to establish cell type-specific expression programs. Here, we have dissected the linkages between DNA methylation (5mC), hydroxymethylation (5hmC), nucleosome repositioning, and binding of the transcription factor CTCF during this process. By integrating MNase-seq and ChIP-seq experiments in mouse embryonic stem cells (ESC) and their differentiated counterparts with biophysical modeling, we found that the interplay between these factors depends on their genomic context. The mostly unmethylated CpG islands have reduced nucleosome occupancy and are enriched in cell type-independent binding sites for CTCF. The few remaining methylated CpG dinucleotides are preferentially associated with nucleosomes. In contrast, outside of CpG islands most CpGs are methylated, and the average methylation density oscillates so that it is highest in the linker region between nucleosomes. Outside CpG islands, binding of TET1, an enzyme that converts 5mC to 5hmC, is associated with labile, MNase-sensitive nucleosomes. Such nucleosomes are poised for eviction in ESCs and become stably bound in differentiated cells where the TET1 and 5hmC levels go down. This process regulates a class of CTCF binding sites outside CpG islands that are occupied by CTCF in ESCs but lose the protein during differentiation. We rationalize this cell type-dependent targeting of CTCF with a quantitative biophysical model of competitive binding with the histone octamer, depending on the TET1, 5hmC, and 5mC state.