The Italian coach has praised his squads “ambitions” but reckons it is unrealistic for them to keep pace at the summit all season.
However Ancelotti IS bidding to take Everton back to Europe this season.
They face a big test of their credentials against Manchester City on Monday on the back of four top flights wins in a row.
The back line including Michael Keane and Yerri Mina at centre back have excelled and Pep Guardiola’s men will need all their invention to break Everton down.
But 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.”
Gylfi Sigurdsson’s late goal snatched the win at Sheffield United, without Richarlison and James Rodriguez.
Ancelotti added: “I am really pleased. It was a victory for the spirit and determination of the team. We scored a fantastic goal with a fantastic combination.
“We have to be patient. The squad is good. The squad has ambition and is really motivated. We had three come off the bench and all helped us to win the game at Sheffield.
“We are pleased to be second. We have won a lot of games. This is the fifth game away we have won this season. That is really good. But we cannot look at that too much. We have another game against Manchester City on Monday.
“We will do our best to prepare, which is almost impossible, but we will try.”
Asked about injuries to his star players, Ancelotti revealed: “James back? No, the players out for the Sheffield game are also out for the City game. Richarlison is fine and we are following the concussion protocol and he will be ready James can be ready after the City game.”