Skeletal muscle insulin resistance entails dysregulation of both glucose and fatty acid metabolism. This study examined whether a combined intervention of physical activity and weight loss influences fasting rates of fat oxidation and insulin-stimulated glucose disposal. Obese (BMI >30 kg/m²) volunteers (9 men and 16 women) without diabetes, aged 39 ± 4 years, completed 16 weeks of moderate-intensity physical activity combined with caloric reduction. Body composition was determined by dual-energy X-ray absorptiometry and computed tomography. Glucose disposal rates (R_d) were measured during euglycemic hyperinsulinemia (40 mU · m⁻² · min⁻¹), and substrate oxidation was determined via indirect calorimetry. Fat mass and regional fat depots were reduced and Vo_2max improved by 19%, from 38.8 ± 1.2 to 46.0 ± 1.0 ml · kg fat-free mass (FFM)⁻¹ · min⁻¹ (P < 0.05). Insulin sensitivity improved 49 ± 10% (6.70 ± 0.40 to 9.51 ± 0.51 mg · min⁻¹ · kg FFM⁻¹; P < 0.05). Rates of fat oxidation following an overnight fast increased (1.16 ± 0.06 to 1.36 ± 0.05 mg · min⁻¹ · kg FFM⁻¹; P < 0.05), and the proportion of energy derived from fat increased from 38 to 52%. The strongest predictor of the improved insulin sensitivity was enhanced fasting rates of fat oxidation, accounting for 52% of the variance. In conclusion, exercise combined with weight loss enhances postabsorptive fat oxidation, which appears to be a key aspect of the improvement in insulin sensitivity in obesity.