I was taught that diabetes is cells in famine surrounded by a feast. Blood sugar is high in diabetics primarily due to insulin deficit or insulin insensitivity, both of which prevent cells from accessing/ "ingesting" the glucose around them.
Turning sugar into fat is a job at the intracellular level. The fat cannot be formed unless the glucose is first brought into the cell, which requires insulin.
Many diabetics in treatment give extra insulin (or promote release of extra insulin) via medication, but matching physiological timing can be tricky. And so fat IS formed when that extra insulin is around, but blood sugar can remain overly high too much of the time, causing damage to nerves and small vessels. Most at risk are eyes, feet, and kidneys, although the heart suffers damage as well.
Hope this helps!