This study investigates the diluent-dependent diffusion flames of an axisymmetric methane jet in annular hot coflow (JHC) of oxidizer diluted by “inert” N2, CO2, and H2O, respectively. The fuel jet issues at an exit Reynolds number of ≈10 000, while the hot (1300 K) coflow oxygen level (molar fraction) varies between 6 and 23%. To identify the chemical and physical factors, simulations of the diffusion flames diluted by fictitious gases XH2O and XCO2 are also conducted. Inspections and analyses to combustion radicals and heat release rates are made on the stoichiometric sheet. Results show that the stoichiometric length, temperature, and volumetric heat release rate vary drastically with coflow oxygen level or dilution extent. The flame volume increases greatly when replacing the diluent N2 with CO2 but reduces substantially under the H2O dilution. Such discrepancies are found to stem mainly from specific physical properties of N2, CO2, and H2O. The CO2 and H2O dilutions show more chemical impact on the formations of key intermediate species. Besides, the dilution by CO2 weakens all the main reactions, thus producing the mildest flame, whereas that by H2O promotes the formations of radicals OH and H2, enhancing the heat release rate. Last, the global heat contributions of C-included and C-excluded (H2–O2) reactions are examined so as to understand the roles of the H2–O2 kinetics in oxy-combustion.