Liverpool's charge to the top of the table has commanded plenty of attention in the battle for the Barclays Premier League crown over the past week.
The in-form Merseysiders have won eight in succession to seize top spot from Chelsea.
City remain third, trailing Liverpool by four points, but with two games in hand, Pellegrini's men could still hold the aces.
Pellegrini said: "They are playing very well.
"They are making (it through) the second round (of fixtures) with a lot of points.
"They won the last eight games in a row, it is not easy what they are doing.
"The important thing to consider is, that Liverpool are doing very well but, if we win our two matches we are two points on top of Liverpool. So, I think we are also doing very well."
Yet Pellegrini is well aware that his side must take advantage of their games in hand, while they also travel to Anfield next week for what will be an eagerly-anticipated fixture.
Chelsea also remain in the thick of the contest, just two points behind Liverpool, while Pellegrini does not think fourth-placed Arsenal should be discounted either.
The Chilean said: "It is exactly the same as one month ago, or three weeks ago, with four teams fighting for the title.
"We have had two matches postponed, we don't have those six points, we have to win them.
"If we can win those matches maybe we can (still) be at the top of the table but at the moment we are behind Liverpool and behind Chelsea.
"Then it is our team and Arsenal. The four teams have chances to win the title. I think it will be very close to the end."
Pellegrini's immediate priority is Saturday's visit of eighth-placed Southampton, who have earned many plaudits for their positive football this season.
The City boss is wary of the threat Mauricio Pochettino's side carry.
"Yes, of course," he said at a press conference to preview the game. "They are a very good team.
"They are playing without pressure, they are in a comfortable situation in the table. They cannot arrive in Europe, they cannot be relegated, they have very good players and a very good manager.
"We are absolutely sure we are going to have a tough game on Saturday."
City will again be without top scorer Sergio Aguero but Pellegrini is hopeful the Argentina striker will be fit for the Liverpool showdown.
Aguero has missed four games with a hamstring injury but is now back in training.
Pellegrini said: "He is not in the squad but he doesn't have any problems with his injury.
"For this week it is too soon for him to start playing because he just worked two days, but next week against Liverpool he will not have any problems."
City are also still without central defender Matija Nastasic but Pellegrini voiced his confidence in the much-maligned Martin Demichelis.
Demichelis, who played under Pellegrini at River Plate and Malaga, has attracted plenty of criticism this season.
Yet after a series of mistakes culminating in his sending off against Barcelona in February, the 33-year-old has lately shown signs of justifying Pellegrini's faith.
Pellegrini said: "He arrived here after three months without playing a game, and when he arrived he had an injury for one month and a half.
"Maybe, like every player, he can make a mistake but he is very important for us during the season and he will continue being important."