Having conceded five times at Brentford before the October international break, O'Neil switched to a back three in an effort to repress a talented City attack.
Despite Jorgen Strand Larsen's early strike being cancelled out by Josko Gvardiol's wonder goal, Wolves impressively remained on level terms until deep into added-on time.
However, in the 95th minute and with their 18th corner of the match, City netted the decisive goal through John Stones' towering header.
How that moment came about will split opinion, however, with Bernardo Silva having made contact off the ball with goalkeeper Jose Sa as the ball was in flight towards Stones.
Although the goal was initially allowed to stand, referee Chris Kavanagh was advised to go to the monitor to make his own interpretation.
With Silva not being in Sa's line of sight, it was deemed that the goal should stand, much to the frustration of O'Neil whose side had a similar goal chalked off against West Ham United last season.
"We don't want to cross that line"
While O'Neil was furious with the decision that went against his team, the Englishman attempted to see both sides of the argument when speaking to Sky Sports.
He said: "I am trying to remain calm. I have been involved in a few of those and not had many go in our favour so was expecting that outcome.
"There is some grey area that can go either way and once it was like that I wasn't confident it would go our way.
O'Neil added: "It was similar to a goal against West Ham last season. We sent an image to referees showing with proof that the West Ham keeper could see the ball, but the reason were given was the player was in close proximity. The same argument could be said here but we just have to accept it.
"I would rather not discuss it because it will still sound like I am making excuses. Whatever decision they make, I respect. We don't want to cross that line, but it did feel like a harsh one. I am proud of the players though. An unbelievable effort and we gave ourselves a great chance. I am gutted for the players that we had to leave with nothing."
What now for Wolves?
Despite producing arguably their best performance of the season, Wolves end the week sitting at the bottom of the Premier League table with just the solitary point.
They are three points adrift of 17th-placed Ipswich Town ahead of a trip to Brighton & Hove Albion in their next game on October 26.