Here specular highlights refer to the bright spots (narrow strips) on the cup. Diffuse reflection is the light shining directly onto the surface. Ambient lighting is the light first bouncing around the room and then shining on the cup.
I'm not entirely sure what the difference is between specular highlights and diffuse reflections. Is it just the viewing angle of specular highlights is such that the light bounces exactly back causing a bright ray, while the viewing angle for diffuse reflection causes it to not be exactly bounced back?
@kevinliu64 For a semi-shiny object like a cup in the picture, it will reflect most of the light in one direction, but some light will reflect in the general vicinity of that direction. Diffuse reflection is coming from an angle where I only see that portion of the light that is being bounced off a bit away from its exact reflecting angle.
I think one way to differentiate between specular highlights and diffuse reflection is that for specular highlights, light bounce off in one direction and you can see the light source clearly; while for diffuse reflection, light bounce off in random directions and you cannot determine the light source.