Here is some geometric intuition. If we are working with sets (think fiber bundle), one way to view the pullback of $E \to B$ via $f \colon B' \to B$ is as the union
$$
f^*B' \cong \bigsqcup_{b' \in B'} E_{f(b')}
.$$
In other words, the fiber of $f(b')$ gets pulled back to form the fiber of $b'$. Alternatively, we may take a more symmetric view, and write the fiber product of $E$ and $F$ over $B$ as
$$
E \times_{B} F \cong \bigsqcup_{b \in B} E_b \times E_f.
$$
With these two viewpoints, we can better understand the geometry of the magic diagram.
Since we have a sequence of maps $X_i \to Y \to Z$, we see that fibers of $X_i$ over $Z$ map onto fibers of $Y$ over $Z$. Combining the data of all these maps, we obtain a map $X_1 \times_Z X_2 \to Y \times_Z Y$, whose fibers are products of fibers of the maps $X_i \to Y$.
For each fiber $Y_z$ of $Y$ over $Z$, we obtain a diagonal map $\delta_z \colon Y_z \to Y_z \times Y_z$, which may be collated to form a single diagonal map $\delta \colon Y \to Y \times_Z Y$. It follows that
$$
\delta^* (X_1 \times_Z X_2) = \bigsqcup_{y \in Y} (X_1 \times_Z X_2)_{(y, y)} = \bigsqcup_{y \in Y} (X_1)_y \times (X_2)_y.
$$
In other words, the pullback along the diagonal map is the disjoint union of the product of the fibers of $X_1$ and $X_2$ over a common point in $Y$. But this is just the fiber product of $X_1$ and $X_2$ over $Y$.
Finally, a bit non-rigorous discussion about what this means. We can describe the situation as having bundle maps $X_i \to Z$ which factor into composition of bundle maps $X_i \to Y \to Z$. If $Z$ is the base space and $X_i$ is the total space, then we may think of $Y$ as a sort of "partial" space. Similarly, we can think of fibers of $X_i$ over $Z$ as being "total" fibers and fibers of $X_i$ over $Y$ as being "partial" fibers. By "stopping early" and considering maps from $X_i$ to $Y$ instead of $X_i$ to $Z$, we can increase the "granularity" of the bundle, turning total fibers into partial fibers.