This is mostly consistent with ganglion cyst in the quadrilateral space (proved on surgery), presenting as quadrilateral space syndrome. 

The quadrilateral space (a.k.a. quadrangular space) has the following borders:

1. teres minor muscle superiorly
2. long head of triceps muscle medially
3. shaft of humerus laterally 
4. teres major muscle inferiorly

Two important anatomic structures in this space are axillary nerve and posterior circumflex humeral artery. Any mass lesions or fibrotic bands  in this space may compromise these structures and cause symptoms. 

The axillary nerve innervates teres minor and deltoid muscles. In this case, the early phase of denervation is represented as edema in this muscle group, which is more apparent on the fat sat images as high signal intensity in the muscles.