Energy transformations in an IC engine cylinder

[Chestermiller]

Could it be that the ignited fuel becomes a heat reservoir as soon as it's ignited, which then causes the temperature of entire volume of gases in the cylinder to rise? So, effectively heat flows from ignited fuel i.e. heat reservoir to surrounding gases within the same cylinder.

Your system is the entirety of the gas, and no heat flows into or out of this system from the surroundings (the engine block) during the combustion step in the process.