The 21-year-old has made just one start in La Liga this term but has nine substitute appearances to his name.
Despite being restricted in match time, Morata has netted twice, including a last-minute equaliser as Real Madrid came from behind to earn a point against Levante in October.
Ancelotti quashed any speculation that Morata would be sent out on loan, with Arsenal and a number of Italian clubs said to be interested in the striker.
"I say, some clubs are interested but the subject is closed," he told Spanish radio station Esradio.
"Morata remains with us because we need a footballer like him at Real Madrid this season.
"Although he has not played many matches this season I have confidence in his work for the team."
Ancelotti also remains confident Real Madrid will be able to extend playmaker Xabi Alonso's stay at the Bernabeu, claiming a new contract would be the ideal Christmas present.
"I can honestly say that Xabi Alonso is the key to this team," he added.
"He is a very important player, he has quality and tremendous experience. His return was a very good thing for this team.
"I'm not worried [about his renewal] because everyone knows how important he is. The club is currently negotiating the contract renewal with him."