O'Neil told BBC Tees: "I think Saturday showed the gulf between where they are and where we are. It is alarming as we need to get back in the Premier League.
"West Brom have finished second, quite a fair way behind Newcastle, so West Brom are in the minimum position that we wanted to be in."
Second-placed West Brom have already been promoted to the Premier League, along with champions Newcastle United.
The Baggies beat Middlesbrough 2-0 on Saturday thanks to goals from Simon Cox and Roman Bednar.
"I think it just showed to everyone, who didn't realise already, just how far short we are of where we need to be if we want to get out the division," added O'Neil.
"The gaffer knows that the squad needs improving. It's been a tough season for everyone and we've used the most players ever in one season I think.
"The fans going from 90 minutes away from winning the UEFA Cup in 2006 to around mid-table is a massive fall for them and the club they love.
"The good thing is you always get another go at it. We've got another go next season and the lads will be more determined."
Source: BBC Sport
Source: BBC Sport