First, he explains that malachim do not know a person's thoughts, (because they are hidden to HaShem) but HaShem did give angels the ability to smell the different intentions people have in their prayers. Through this ability the angels are able to know which prayers to offer up to HaShem in heaven such that they will produce a 'pleasant smelling offering.' (ריח נחוח)
Second, that Tzaddikim can know the thoughts behind a person's speech. This is how Mosheh Rabbeinu was able to know that even though the people were crying in their tents about 'the fish they had in Egypt,' he knew they were crying about the newly-prohibited marital relationships.
Third, that all the thoughts a person has are expressed in their prayers. This is how the angels discovered that Bnei Yisrael was crying over forbidden marital relationships. Because Mosheh Rabbeinu knew the thoughts behind their words, and prayed on their behalf, and Mosheh's thoughts entered into his prayers and the angels smelled his prayers. Otherwise the angels could never have known of Bnei Yisrael's true desires.
This explains why Mosheh sees this particular incident as his own failure, and asks to be killed rather than see his own folly in rearing the nation.