This paper investigates the potential of palladium (Pd) and its clusters-doped tungsten ditelluride (WTe2) monolayer materials for the detection of dissolved gases (such as CH4, C2H2, and C2H4) in transformer oil. Density functional theory (DFT) was used to study the effect of Pdn (n = 1–4) doping on the gas sensing and adsorption properties of WTe2 monolayer materials. The results show that Pdn doping can significantly improve the adsorption capacity and gas sensing performance of WTe2 to these gas molecules, especially showing excellent performance in detecting acetylene and ethylene. Studies have shown that Pdn doping improves the electrical conductivity of WTe2, making it more suitable for the development of gas sensors. Through the calculation of state density, molecular orbital and charge density difference, the adsorption mechanism of Pdn-doped WTe2 monolayer to different gas molecules was revealed. This study provides a theoretical basis and guidance for the development of efficient sensor materials for fault gas detection in transformer oil. In conclusion, the proposed Pd-doped WTe2 monolayer demonstrates promising potential for detecting dissolved gases in transformer oil. Future work will focus on experimental validation and further optimization of the material’s sensitivity and selectivity towards other gas species.