Bone homeostasis within the skeletal system is predominantly maintained by bone formation and resorption, where formation of new bone involves maturation of stromal cells to mineral and matrix secreting mature osteoblasts, which requires cellular energy or adenosine triphosphate. Alterations in systemic metabolism can influence osteoblast function. In line with this, type 2 diabetes mellitus (T2DM), a common metabolic disorder is also associated with reduced bone formation and increased risk of fracture. Impairment in lipid metabolism is one of the key features associated with T2DM-related pathologies in multiple tissues. Therefore, we tested the hypothesis that the reduced bone formation reported in obese murine models of impaired glucose tolerance is a function of disrupted lipid metabolism in osteoblasts. We first confirmed that mice fed a high-fat diet (HFD) have reduced bone microarchitecture along with lower bone formation rates. Interestingly, osteoblasts from obese mice harbor higher numbers of cytosolic lipid droplets along with decreased bioenergetic profiles compared to control cells. Further supporting this observation, bone cortex demonstrated higher total lipid content in HFD fed mice compared to control-fed mice. As a further proof of principle, we generated a novel murine model to conditionally delete Plin2 in osteoblast-progenitor cells using Prrx1-Cre, to enhance lipid droplet breakdown. Our data demonstrate that knocking down Plin2 in an osteoprogenitor specific manner protects from HFD induced osteoblast dysfunction. Furthermore, the mechanism of action involves enhanced osteoblast fatty acid oxidation. In conclusion, the current studies establish that HFD induced glucose intolerance leads to perturbations in osteoblast lipid metabolism, thus causing lower bone formation, which can be protected against by increasing fatty acid oxidation.