In diabetic patients, dyslipidemia frequently contributes to organ damage such as diabetic kidney disease (DKD). Dyslipidemia is associated with both excessive deposition of triacylglycerol (TAG) in lipid droplets (LDs) and lipotoxicity. Yet, it is unclear how these two effects correlate with each other in the kidney and how they are influenced by dietary patterns. By using a diabetes mouse model, we find here that high-fat diet enriched in the monounsaturated oleic acid (OA) caused more lipid storage in LDs in renal proximal tubular cells (PTCs) but less tubular damage than a corresponding butter diet with the saturated palmitic acid (PA). This effect was particularly evident in S2/S3 but not S1 segments of the proximal tubule. Combining transcriptomics, lipidomics, and functional studies, we identify endoplasmic reticulum (ER) stress as the main cause of PA-induced PTC injury. Mechanistically, ER stress is caused by elevated levels of saturated TAG precursors, reduced LD formation, and, consequently, higher membrane order in the ER. Simultaneous addition of OA rescues the cytotoxic effects by normalizing membrane order and increasing both TAG and LD formation. Our study thus emphasizes the importance of monounsaturated fatty acids for the dietary management of DKD by preventing lipid bilayer stress in the ER and promoting TAG and LD formation in PTCs.