The purpose of this study was to examine the effects of level of rumen inert fatty acids on developmental competence of oocytes in lactating dairy cows. Estrous cycles were synchronized in 22 cows on a silage-based diet supplemented with either low (200 g/day) or high (800 g/day) fat. A total of 1051 oocytes were collected by ultrasound-guided ovum pickup (OPU) in seven sessions/cow at 3–4 day intervals. Oocytes were matured, fertilized, and cultured to the blastocyst stage in vitro. Embryo quality was assessed by differential staining of Day 8 blastocysts. The high-fat diet reduced numbers of small and medium follicles. There was no effect on the quality of oocytes (grades 1–4) or cleavage rate. However, high fat significantly improved blastocyst production from matured (P < 0.005) and cleaved (P < 0.05) oocytes. Blastocysts from the high-fat group had significantly more total, inner cell mass and trophectoderm cells than the low-fat group (P < 0.05). Regression analysis showed negative effects of milk yield (P < 0.001), dry matter intake (P < 0.001), metabolizable energy intake (P < 0.005), and starch intake (P < 0.001) on blastocyst production in the low-fat group but not in the high-fat group. Within the low-fat group, blastocyst production was negatively related to growth hormone (P < 0.05) and positively related to leptin (P < 0.05). The low-fat group had higher nonesterified fatty acids than the high-fat group (P < 0.05). In conclusion, higher milk yields were associated with reduced developmental potential of oocytes in cows given a low-fat diet. Provision of a high-fat diet buffered oocytes against these effects, resulting in significantly improved developmental potential.