The Republic of Ireland will face Wales, Austria, Serbia, Moldova and Georgia in Group D.
“I must admit, I was a wee bit concerned when Serbia came out after us,” O’Neill said after Saturday’s draw in St Petersburg. “I thought that would leave the top two teams pretty difficult.”
“Austria are on a very good run at this moment, and obviously Wales have propelled themselves forward brilliantly recently.
“But overall, it’s a draw we think is okay. It could have been worse, it could have been a lot better.”
O’Neill was full of praise for Wales, but questioned the system that made them one of the draw’s top seeds despite having not featured at a major tournament since 1958.
“It’s been a remarkable rise. To go from sixth into the top seeds,” said O’Neill, whose team was in the pot of No 4 seeds despite having played at the 2012 European Championship.
“I don’t know what sort of system FIFA use anymore, and I’m not even sure FIFA know what sort of system they use,” he said.
The former Northern Ireland international added: “Even they might’ve been surprised themselves to be No 1 seeds, but the results have gone their way and they have fought very hard for them.
“They are within an inch of qualifying for France (2016 European Championships), and that’s great credit to them, so they deserve their accolades.”
Wales are currently top of their Euro 2016 qualifying group, while the Republic of Ireland sit fourth in theirs with four games remaining.
Wales manager Chris Coleman said he was relishing the chance to go head-to-head with O’Neill: “I know Martin very well,” he said, “and they will be a couple of juicy games.”