Obesity is characterized by excessive rates of plasma fatty acid mobilization and uptake, which play a key role in mediating insulin resistance. While weight loss via diet-only or a diet + exercise program clearly improves insulin sensitivity, the precise mechanisms modulating this improvement are not completely understood. The purpose of the present study was to determine the role of the reduced fatty acid mobilization and uptake after weight loss in obese women who were randomly assigned to lifestyle interventions of either weight loss without exercise (WL) (n = 7) or a weight loss + exercise program (WL + EX) (n = 10). Before and after losing 12% of their body weight, we measured insulin sensitivity (S(I)), systemic fatty acid rate of appearance (Ra) and disappearance (Rd), oxidative capacity, and markers for pro-inflammatory pathways in skeletal muscle. Fatty acid Ra and Rd were reduced by 30% after both interventions (P < 0.05). While oxidative capacity increased 25% in WL + EX (compared with no increase after WL), the improvement in S(I) was identical in both groups (60%; P < 0.05), and skeletal muscle pro-inflammatory pathways were reduced (P < 0.05) similarly in both groups. When we artificially increased fatty acid mobilization after weight loss to pre-weight-loss levels via an overnight lipid infusion, the improvement in S(I) was almost completely reversed. Importantly, WL + EX did not protect against this lipid-induced reversal in S(I) despite a significant increase in resting whole-body fat oxidation and a marked increase in skeletal muscle oxidative capacity. In conclusion, reduced fatty acid mobilization and uptake appears to be a primary mediator of improved insulin sensitivity after weight loss. Moreover, enhancing fatty acid oxidative capacity via exercise training is not sufficient to prevent the insulin resistance caused by high fatty acid mobilization, such as that found in obesity.