Real Madrid had a dream start to Champions League and La Liga this season.
The Galacticos have won eight games in a row in all competitions which leaves them topping the La Liga table and also the Champions League group table.
They will be facing Inter Milan at Santiago Bernabeu on Tuesday night.
Madrid suffered a defeat at the hands of Thomas Tuchel’s men last season in the semi-finals.
Ancelotti believes they can compete with the likes of Manchester City, Liverpool, Bayern Munich and others in the Champions League.
“I can’t say if we’re favourites or not, but I can say we can compete with all those teams,” Ancelotti said in a news conference when asked about Liverpool, City and Bayern.
“With the quality and experience we have, we can compete. After that we’ll have to wait and see.
“If you want to win this competition you have to face the best teams in the world whether it’s in the last-16, in the quarterfinals… I think we can compete. I don’t know if we’ll win, but compete yes, for sure.”