First of all, Neo put himself within Michael's reach when he held on to the staff when he retracted it to 8-feet long, as Michael pulled the staff in while retracting it. And, again, Michael was not kidding when he said that nothing Neo could do would surprise him. Michael is already sure Neo is an Alchemist, and when you're fighting an Alchemist it goes without saying that you don't let them use potions. Seeing the flask was enough.