Last season, O'Reilly made a big impression playing primarily at left-back under coach Pep Guardiola.
However, Guardiola sees O'Reilly's long-term potential in midfield, where he can make a bigger impact.
The club is now ready to offer O'Reilly a long-term deal to secure his place in the senior team's plans.
Guardiola praised O'Reilly last season, saying he was grateful for the young player's contributions and that he was taking his opportunities.