The 24-year-old midfielder, who joined from Wigan in 2009, was due to be out of contract at the end of the season but secured his long-term future with the Black Cats on Monday.
It serves as a timely boost for Sunderland ahead of Tuesday night's Capital One Cup fourth round derby match against Middlesbrough, the club where Cattermole began his career.
"I think he has excellent potential," O'Neill said of Cattermole.
"I have only got to know him in the last nine or 10 months and during his time on the field he was looking to improve his own game.
"As a consequence of our battles last season he was trying to help everyone around him but maybe he needs to concentrate on his own particular game.
"I think that game can flourish but a lot of it can be up to himself. I think he's capable of doing more."
O'Neill has been vocal about the midfielder's need to maintain his discipline, with a sending off in the last round of the Capital One Cup his seventh red card of his career.
However, despite his early dismissal in that match, Sunderland made it through to face Middlesbrough and O'Neill is by no means just in the competition the make up the numbers.
"I'm pleased to have the game. I would rather be in the competition than out of it," O'Neill said.
"When Lee got sent off against MK Dons I must admit it became a difficult evening for us considering he was sent off so early in the match.
"We weathered that and we came through and we did very well. There's no point in wasting that.
"Let us try and win the game."
Sunderland faced local rivals Middlesbrough twice last season in FA Cup competition, with O'Neill's side earning the bragging rights after they won a highly-charged replay at the Riverside Stadium.
Middlesbrough, who are currently third in the npower Championship, are on a good run of form having secured 10 points from their last five games - something O'Neill is well aware of.
"Those games last season were very difficult for us and considering that Middlesbrough might have reflected on their league position last year, they played very well against us on both occasions.
"I feel that they have the capabilities and have a bit of firepower and have a bit of creativity in their side."
As for his own side's strike force, the Sunderland boss knows his side needs to start firing and scoring goals of their own after a slow start.
Sunderland have drawn six of their eight opening Barclays Premier League fixtures and summer signing Steven Fletcher has scored five of their six league goals.
"It's very important for us now to score more goals and give ourselves a chance instead of relying on the defence," O'Neill said.