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In my solo game I denied Soviet claim to Bessarabia & I now have moved some Russian units into Rumania proper as well as Bess.

Now the Axis turn and I notice that I can rail German land units into Bucharest which means Russia cannot possibly defeat Rumania.

Should this be allowed? Am I missing something?

Yes, this is allowed. This rule is often referred as the "peacekeeping" rule.

German units cannot attack Soviet controlled hexes if they are not at war with the USSR, but the Russian units can attack Rumanian controlled hexes (even with neutral German units in those hexes) because the USSR is at war with Rumania.

USSR can indeed defeat Rumania, even with German units present. And you get the added pleasure of destroying German units while you do it.

If it gets to daunting just remember that there are only secondary supply sources in Rumania for the German units. So cut their rail link to Germany so they get out of supply and use your superior bomber force to disorganize them.

I always play with a Stalin who is not aggressive early on. By that I mean he is looking for cheap gains with little or no risk. Historically he knew he wasn't ready for war and hoped to expand his borders as possible, but only risked war when Finland wouldn't "bend over" - and that didn't go very well initially.
So depending on how things are going in Europe (and that the Japs stay focused on China) I always have Uncle Joe take his cut of Poland and the Baltic states, "demands" appropriate chunks of Finland and Rumania but will not push things past either of the new "borders" regardless of Adolf's reactions, and occasionally will make a move on Persia, particularly if it looks like Italy will be going heavily toward Egypt.
I guess if I was playing competitively as the Soviet Union I'd make a big move against Rumania if the option was there for me. The idea of denying Hitler Rumanian oil as well as forces, plus a road to Greece, plus keeping Bulgaria out of the Axis camp - all VERY good for Stalin and bad for the Axis.
I find the only way to have a prayer as the Axis player is to do a clean sweep of the potential Axis partners in Europe - so working toward a land route to Greece is critical so I can get Yugoslavia in the Axis camp - along with Hungary, Rumania, Bulgaria, and Finland. If things go well in North Africa eventually getting Iraq and Persia make getting Turkey pretty easy following the invasion of Russia, and that in turn makes defending the Rodina that much more difficult for Stalin.
As for Spain, when it is possible by invasion it is AWESOME to have Franco & the Nationalists in the Axis camp, but if it just isn't possible invading Spain is always an alternative. One way or another, Gibraltar has to be taken. Of course that doesn't mean much to Uncle Joe, except for the possibility of Italian naval units in the Black Sea once Turkey is on board! MUCH easier to take Sevastopol when you can do massive naval bombardment!

The problem in denying the claim is Russia can SB the oil fields and playing the oil option really hurts Germany.

And they can trade units with Germany / Romania before going to war with Germany at a ratio that is better than what can be expected after a German invasion of USSR.