Prolyl hydroxylase enzymes (PHDs) sense cellular oxygen upstream of hypoxia-inducible factor (HIF) signalling leading to HIF degradation in normoxic conditions. Here we demonstrate that adipose PHD2 inhibition plays a key role in the suppression of adipocyte lipolysis. Adipose Phd2 gene ablation in mice enhanced adiposity, with a parallel increase in adipose vascularization associated with reduced circulating non-esterified fatty acid (NEFA) levels and normal glucose homeostasis. Phd2 gene-depleted adipocytes exhibited lower basal lipolysis in normoxia and reduced β-adrenergic-stimulated lipolysis in both normoxia and hypoxia. A selective PHD inhibitor suppressed lipolysis in murine and human adipocytes in vitro and in vivo in mice. PHD2 genetic ablation and pharmacological inhibition attenuated protein levels of the key lipolytic effectors hormone-sensitive lipase and adipose triglyceride lipase (ATGL), suggesting a link between adipocyte oxygen sensing and fatty acid release. PHD2 mRNA levels correlated positively with mRNA levels of AB-hydrolase domain containing-5 (ABHD5), an activator of ATGL, and negatively with mRNA levels of lipid droplet proteins, perilipin and TIP47 in human subcutaneous adipose tissue. Therapeutic "pseudohypoxia" caused by PHD2 inhibition in adipocytes blunts lipolysis and promotes benign adipose tissue expansion and may have therapeutic applications in obesity or lipodystrophy.