The Black Cats slipped to 12th with defeat after it looked like Craig Gardner's first-half penalty would be enough to secure a point after Jimmy Kebe's opener.
The visitors had a couple of chances of their own to claim the victory but O'Neill was ultimately left riled by Reading's late goal, scored by Kebe.
He said: "Naturally I'm disappointed to concede so late in the game, particularly on the back of a couple of really good chances we had ourselves
"I thought Reading started better than us and got a goal in front but we started to come into the game a bit more before we scored the penalty."
Alfred N'Diaye missed a golden opportunity for the visitors and debutant Danny Graham forced a great reaction save from Adam Federici before Kebe's winner and O'Neill felt that if either had managed to put his side in front they would have gone on to see the game out.
"In the second half, as the game was to-ing and fro-ing, I thought we looked in reasonable control," he added.
"Anything can happen, of course, but we have had some really decent to chances to go and score - had we done so it might have been a long way back for Reading."
Kebe's winner came from an Ian Harte free-kick, the 35-year-old's set-pieces proving a constant menace to a team for whom he had short stint earlier in his career.
O'Neill was not surprised by Harte's threat and said: "We've spoken about it before. His delivery has been great for years so, unless some of the new players who have come into the league don't know enough about him, anybody who has been in this league for a while knows how good he is."