Unable to Create Disk Image

Within Disk Utility check how much "Free" storage space is on that volume.....ignore the "Available" storage space value since it is very misleading. The "Free" space value is the only value of any importance. You always need to have at least 20GB+ of Free space at all times for the normal operation of macOS....ideally you should have much more.

Also, it is best to only create the DMG (or sparsebundle even) on either an HFS+ or APFS volume. I have seen Disk Utility and some third party apps silently fail or have cryptic errors when the destination volume is something else than these two file systems.

How large is this folder? You will need to have at least that size + 20GB if storing it on the boot volume.

Creating a read-only Compressed DMG of a folder should work if you have enough Free storage space. Otherwise it would seem to be a Sequoia bug.

Feedback - macOS - Apple

There are third party apps that can make that DMG file as well such as Carbon Copy Cloner (CCC). I know with CCC that you need at least 2x the space because it first creates a dynamic expandable sparsebundle file which is then converted into a compressed DMG file. I don't know if the same thing occurs when using Disk Utility. I do know that Disk Utility is a very poor app that I try to avoid except for creating very small DMG files since I usually have issues creating larger DMG files using Disk Utility. I've never had any issues with CCC.

Edit: Where is the destination of the DMG file you are creating? Is it within your home user folder....Desktop, Documents, Downloads? If not, then it may be a permissions problem. macOS has gotten very complicated.

When you create a blank image, select Image Format = sparse disk image and give it a maximum size. The image file will only be a few MB to start out with and will only grow as you add content to it, up to its maximum size. The filetype will be "sparseimage" not "dmg" but it will work the same.

phkc070408 wrote:

I suspect my Mac was telling me that the image doesn't have enough space, not my Mac.

It's more likely that you've simply run out of free storage. I realize that you posted that you had 937 GB free, but this concept is much more confusing than it seems. In most places, it never tells you how much storage you have "free". It tells you how much you have "available", which is totally different.

So, what happens is that you try to create a big disk image and you don't have enough free storage for that. As side effect of that storage allocation failure, the "deleted" daemon frees up some of that "available" storage and turns it into truly "free" storage. By the time you try again with a compressed image, you now have enough free storage.