What might cause this?
Loose connection?
My thought also.
So why aren’t the bare conductors “hot”? 
They’re poor emitters and are reflecting the background.
At the same color range?
You would think they would be different to some degree. The wire sheath and metal would reflect different.
Whats the possibility of OX paste on the wire preventing the exposed alum from showing a heat reading? 
Probably a loose or high resistance connection at the terminal. It would be easier to determine without the fusion. Would like to see a plain IR image with more of the conductor showing. You will likely see rapid heat dissipation the further you move up the conductor away from the connection.
My money says it is. But why doesn’t it look like it is?
My money is on a loose terminal and a time factor but just guessing I would think the amp load had just been increased and the wire itself had not had time to heat as much as the loose terminal connection and the outer insulation. Would be nice to know the amp draw and when it was applied was it a constant load or variable **inquiring minds want to know **:D:D
Yup… 
Is the lug really that hot or are we seeing part of a reflection from some other heat source like an incandescent bulb above the panel or behind the inspector? What was the reflected background temp measurements?
Interesting thermal exception that sure leads to a lot of additional unanswered questions! 
Give a man a fish, he eats for a day… teach a man to fish, he eats for a lifetime. 
Only if he can find a shovel to dig the worms! :shock:
Well… true dat!
Thanks for the responses fellas. I took several pictures at different angles and the temp never changed on the lug. The breaker for the water heater was in the 150 degree range as well. This was actually a re-inspection after it was “fixed” from about a month ago. You can see the other side is not warm at all. There was a small amount of OX paste on the wire. I sent this image to the electrician so he could see what I was looking at.
Nothing takes the place of being on site all we can do is guess
Doesn’t look characteristic of a reflection to me. Looking at the recess of the lug you can see that it shows as one of the hottest points of the image. Cavities are good emitters and poor reflectors. If we were seeing reflected heat, the cavity would likely look cooler rather than hotter. Also the conductor insulation shows heat.
I still want to see a full frame IR image of this without the fusion.
hanks Brad, I was hoping that more of the conductor would be visible in the frame. Go with loose or high resistance connection as possible cause.