The avascular nature of cartilage makes it a unique tissue1-4, but whether and how the absence of nutrient supply regulates chondrogenesis remain unknown. Here we show that obstruction of vascular invasion during bone healing favours chondrogenic over osteogenic differentiation of skeletal progenitor cells. Unexpectedly, this process is driven by a decreased availability of extracellular lipids. When lipids are scarce, skeletal progenitors activate forkhead box O (FOXO) transcription factors, which bind to the Sox9 promoter and increase its expression. Besides initiating chondrogenesis, SOX9 acts as a regulator of cellular metabolism by suppressing oxidation of fatty acids, and thus adapts the cells to an avascular life. Our results define lipid scarcity as an important determinant of chondrogenic commitment, reveal a role for FOXO transcription factors during lipid starvation, and identify SOX9 as a critical metabolic mediator. These data highlight the importance of the nutritional microenvironment in the specification of skeletal cell fate.