The Blues currently sit in second place behind Merseyside rivals Liverpool.
They face a big test of their credentials against Manchester City on Monday on the back of four top flights wins in a row.
Ancelotti said: “I think realistically no, we are not contenders for the title.
“Our target doesn't change. There is a lot of competition in the Premier League, a lot of fantastic teams. We are happy to be second now but our target is to reach a European position.
“We want to play in Europe next season and that doesn't change.
“After one year we have progressed really well. The team has a good spirit. The players are motivated. We have had good signings. The progress is really good.
“If we beat Man City on Monday it will be the same. We have to be honest.
“We are not at the same level as these teams. We want to be as soon as possible. We are working to be there. Ask me today and we have to be honest."