UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2011.


OR


 ̈
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for thetransition period from                      to                     .





Commission File Number: 001-34016


United States Heating Oil Fund, LP


(Exact name of registrant as specified in its charter)





Delaware

20-8837345(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)





1320 Harbor Bay Parkway, Suite 145


Alameda, California 94502


(Address of principal executive offices) (Zip code)





(510) 522-9600


(Registrant’s telephone number, including area code)





N/A


(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.





x Yes     ̈ No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).





 ̈ Yes     ̈ No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer    ̈
Accelerated filer    ̈Non-accelerated filer   x
Smaller reporting company    ̈(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).





 ̈ Yes    x No





UNITED STATES HEATING OIL FUND, LP


Table of Contents





PagePart I. FINANCIAL INFORMATIONItem 1.  Condensed Financial Statements.

1Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

15Item 3. Quantitative and Qualitative Disclosures About Market Risk.

33Item 4. Controls and Procedures.

34Part II. OTHER INFORMATIONItem 1. Legal Proceedings.

35Item 1A. Risk Factors.

35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

35Item 3. Defaults Upon Senior Securities.

35Item 4. Removed and Reserved.

35Item 5. Other Information.

35Item 6. Exhibits.

35





Part I.FINANCIAL INFORMATION





Item 1. Condensed Financial Statements.





Index to Condensed Financial Statements





Documents

PageCondensedStatements of Financial Condition at March 31, 2011 (Unaudited) and December 31, 2010

2CondensedSchedule of Investments (Unaudited) at March 31, 2011

3Condensed Statements of Operations (Unaudited) for the three months ended March 31, 2011 and 2010

4Condensed Statement of Changes in Partners’ Capital (Unaudited) for the three months ended March 31, 2011

5Condensed Statements of Cash Flows (Unaudited) for the three months ended March 31, 2011 and 2010

6Notes to Condensed Financial Statements for the period ended March 31, 2011 (Unaudited)

7


1





United States Heating Oil Fund, LP


Condensed Statements of Financial Condition


At March 31, 2011 (Unaudited) and December 31, 2010





March 31, 2011


December 31, 2010AssetsCash and cash equivalents (Note 5)

$
9,580,605


$
10,405,533Equity in UBS Securities LLC trading accounts:Cash


918,998



1,039,996Unrealized gain on open commodity futures contracts


132,468



267,658Receivable from General Partner (Note 3)


45,171



182,968Dividend receivable


228



313Other assets


236,857



238,532Total assets

$
10,914,327


$
12,135,000Liabilities and Partners' CapitalProfessional fees payable

$
49,320


$
199,658General Partner management fees payable (Note 3)


5,430



5,965Brokerage commissions payable


271



371Other liabilities


892



797Total liabilities


55,913



206,791Commitments and Contingencies(Notes 3, 4 and 5)Partners' CapitalGeneral Partner


-



-Limited Partners


10,858,414



11,928,209Total Partners’ Capital


10,858,414



11,928,209Total liabilities and partners’ capital

$
10,914,327


$
12,135,000Limited Partners’ units outstanding


300,000



400,000Net asset value per unit

$
36.19


$
29.82Market value per unit

$
36.12


$
29.86





See accompanying notes to condensed financial statements.


2





United States Heating Oil Fund, LP


Condensed Schedule of Investments (Unaudited)


At March 31, 2011





Gain onNumber of


Open
Commodity


% of Partners’Contracts


Contracts


CapitalOpen Futures Contracts - LongUnited States ContractsNYMEX Heating Oil Futures HO contracts, expiring May 2011


83


$
132,468



1.22Principal

Amount


Market

ValueCash EquivalentsUnited States - Money Market FundsFidelity Institutional Government Portfolio - Class I

$
2,807,389


$
2,807,389



25.86Morgan Stanley Institutional Liquidity Fund - Government Portfolio


6,000,609



6,000,609



55.26Total Cash Equivalents





$
8,807,998



81.12





See accompanying notes to condensed financial statements.


3





United States Heating Oil Fund, LP


Condensed Statements of Operations (Unaudited)


For the three months ended March 31, 2011 and 2010





Three months ended

March 31, 2011


Three months ended

March 31, 2010IncomeGain (loss) on trading of commodity futures contracts:Realized gain on closed positions

$
2,286,585


$
1,003,518Change in unrealized loss on open positions


(135,190
)


(911,123
)Dividend income


761



713Interest income


73



160Other income


1,000



1,000Total income


2,153,229



94,268ExpensesProfessional fees


49,320



86,200General Partner management fees (Note 3)


16,596



22,315Brokerage commissions


1,799



3,572Other expenses


2,989



1,448Total expenses


70,704



113,535Expense waiver (Note 3)


(45,171
)


(80,621
)Net expenses


25,533



32,914Net income

$
2,127,696


$
61,354Net income per limited partnership unit

$
6.37


$
0.31Net income per weighted average limited partnership unit

$
6.18


$
0.11Weighted average limited partnership units outstanding


344,444



571,111





See accompanying notes to condensed financial statements.


4





United States Heating Oil Fund, LP


Condensed Statement of Changes in Partners’ Capital (Unaudited)


For the three months ended March 31, 2011





General
Partner


Limited
Partners


TotalBalances, at December 31, 2010

$
-


$
11,928,209


$
11,928,209Redemption of 100,000 partnership units


-



(3,197,491
)


(3,197,491
)Net income


-



2,127,696



2,127,696Balances, at March 31, 2011

$
-


$
10,858,414


$
10,858,414Net Asset Value Per Unit:At December 31, 2010

$
29.82At March 31, 2011

$
36.19





See accompanying notes to condensed financial statements.


5




United States Heating Oil Fund, LP


Condensed Statements of Cash Flows (Unaudited)


For the three months ended March 31, 2011 and 2010





Three months ended


Three months endedMarch 31, 2011


March 31, 2010Cash Flows from Operating Activities:Net income

$
2,127,696


$
61,354Adjustments to reconcile net income to net cash provided by operating activities:(Increase) decrease in commodity futures trading account - cash


120,998



(524,946
)Unrealized loss on futures contracts


135,190



911,123Decrease in receivable from General Partner


137,797



130,906(Increase) decrease in dividend receivable and other assets


1,760



(17,606
)Decrease in professional fees payable


(150,338
)


(139,550
)Decrease in General Partner management fees payable


(535
)


(953
)Decrease in brokerage commissions payable


(100
)


-Increase (decrease) in other liabilities


95



(74
)Net cash provided by operating activities


2,372,563



420,254Cash Flows from Financing Activities:Redemption of partnership units


(3,197,491
)


(2,659,874
)Net cash used in financing activities


(3,197,491
)


(2,659,874
)Net Decrease in Cash and Cash Equivalents


(824,928
)


(2,239,620
)Cash and Cash Equivalents, beginning of period


10,405,533



13,521,796Cash and Cash Equivalents, end of period

$
9,580,605


$
11,282,176





See accompanying notes to condensed financial statements.


6


United States Heating Oil Fund, LP


Notes to Condensed Financial Statements


For the period ended March 31, 2011 (Unaudited)




NOTE 1 - ORGANIZATION AND BUSINESS





The United States Heating Oil Fund, LP (“USHO”) was organized as a limited partnership under the laws of the state of Delaware on April 13, 2007.  USHO is a commodity pool that issues limited partnership units (“units”) that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”).  Prior to November 25, 2008, USHO’s units traded on the American Stock Exchange (the “AMEX”).  USHO will continue in perpetuity, unless terminated sooner upon the occurrence of one or more events as described in its Amended and Restated Agreement of Limited Partnership dated as of March 7, 2008 (the “LP Agreement”).  The investment objective of USHO is for the daily changes in percentage terms of its units’ net asset value to reflect the daily changes in percentage terms of the spot price of heating oil (also known as No. 2 fuel oil) for delivery to the New York harbor as measured by the changes in the price of the futures contract for heating oil traded on the New York Mercantile Exchange (the “NYMEX”) that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case the futures contract will be the next month contract to expire, less USHO’s expenses.  It is not the intent of USHO to be operated in a fashion such that the net asset value will equal, in dollar terms, the spot price of heating oil or any particular futures contract based on heating oil.  USHO accomplishes its objective through investments in futures contracts for heating oil, crude oil, gasoline, natural gas and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Futures Contracts”) and other heating oil-related investments such as cash-settled options on Futures Contracts, forward contracts for heating oil, cleared swap contracts and over-the-counter transactions that are based on the price of heating oil, crude oil and other petroleum-based fuels, Futures Contracts and indices based on the foregoing (collectively, “Other Heating Oil-Related Investments”).  As of March 31, 2011, USHO held 83 Futures Contracts for heating oil traded on the NYMEX.





USHO commenced investment operations on April 9, 2008 and has a fiscal year ending on December 31.  United States Commodity Funds LLC (“USCF”) is responsible for the management of USHO.  USCF is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective December 1, 2005.  USCF is also the general partner of the United States Oil Fund, LP (“USOF”), the United States Natural Gas Fund, LP (“USNG”), the United States 12 Month Oil Fund, LP (“US12OF”) and the United States Gasoline Fund, LP (“UGA”), which listed their limited partnership units on the AMEX under the ticker symbols “USO” on April 10, 2006, “UNG” on April 18, 2007, “USL” on December 6, 2007 and “UGA” on February 26, 2008, respectively.  As a result of the acquisition of the AMEX by NYSE Euronext, each of USOF’s, USNG’s, US12OF’s and UGA’s units commenced trading on the NYSE Arca on November 25, 2008.  USCF is also the general partner of the United States Short Oil Fund, LP (“USSO”), the United States 12 Month Natural Gas Fund, LP (“US12NG”) and the United States Brent Oil Fund, LP (“USBO”), which listed their limited partnership units on the NYSE Arca under the ticker symbols “DNO” on September 24, 2009, “UNL” on November 18, 2009 and “BNO” on June 2, 2010, respectively.  USCF is also the sponsor of the United States Commodity Index Fund (“USCI”), a series of the United States Commodity Index Funds Trust (the “Trust”), which listed its units on the NYSE Arca under the ticker symbol “USCI” on August 10, 2010.  USCF has also filed a registration statement to register units of the United States Metals Index Fund, the United States Agriculture Index Fund and the United States Copper Index Fund, three additional series of the Trust.




USHO issues units to certain authorized purchasers (“Authorized Purchasers”) by offering baskets consisting of 100,000 units (“Creation Baskets”) through ALPS Distributors, Inc., as the marketing agent (the “Marketing Agent”).  The purchase price for a Creation Basket is based upon the net asset value of a unit calculated shortly after the close of the core trading session on the NYSE Arca on the day the order to create the basket is properly received.




In addition, Authorized Purchasers pay USHO a $1,000 fee for each order placed to create one or more Creation Baskets or to redeem one or more baskets consisting of 100,000 units (“Redemption Baskets”).  Units may be purchased or sold on a nationally recognized securities exchange in smaller increments than a Creation Basket or Redemption Basket.  Units purchased or sold on a nationally recognized securities exchange are not purchased or sold at the net asset value of USHO but rather at market prices quoted on such exchange.


7





In April 2008, USHO initially registered 10,000,000 units on Form S-1 with the U.S. Securities and Exchange Commission (the “SEC”).  On April 9, 2008, USHO listed its units on the AMEX under the ticker symbol “UHN”.  On that day, USHO established its initial net asset value by setting the price at $50.00 per unit and issued 200,000 units in exchange for $10,001,000.  USHO also commenced investment operations on April 9, 2008, by purchasing Futures Contracts traded on the NYMEX based on heating oil.  As of March 31, 2011, USHO had registered a total of 60,000,000 units.





The accompanying unaudited condensed financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosure required under accounting principles generally accepted in the United States of America (“GAAP”).  The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the condensed financial statements for the interim period.





NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Revenue Recognition





Commodity futures contracts, forward contracts, physical commodities, and related options are recorded on the trade date.  All such transactions are recorded on the identified cost basis and marked to market daily.  Unrealized gains or losses on open contracts are reflected in the condensed statement of financial condition and represent the difference between the original contract amount and the market value (as determined by exchange settlement prices for futures contracts and related options and cash dealer prices at a predetermined time for forward contracts, physical commodities, and their related options) as of the last business day of the year or as of the last date of the condensed financial statements.  Changes in the unrealized gains or losses between periods are reflected in the condensed statement of operations.  USHO earns interest on its assets denominated in U.S. dollars on deposit with the futures commission merchant at the overnight Federal Funds Rate, less 32 basis points.  In addition, USHO earns income on funds held at the custodian at prevailing market rates earned on such investments.





Brokerage Commissions





Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.




Income Taxes





USHO is not subject to federal income taxes; each partner reports his/her allocable share of income, gain, loss deductions or credits on his/her own income tax return.




In accordance with GAAP, USHO is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any tax related appeals or litigation processes, based on the technical merits of the position.  USHO files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states.  USHO is not subject to income tax return examinations by major taxing authorities for years before 2007 (year of inception).  The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.  De-recognition of a tax benefit previously recognized results in USHO recording a tax liability that reduces net assets.  However, USHO’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.  USHO recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed.  No interest expense or penalties have been recognized as of and for the period ended March 31, 2011.





Creations and Redemptions





Authorized Purchasers may purchase Creation Baskets or redeem Redemption Baskets only in blocks of 100,000 units at a price equal to the net asset value of the units calculated shortly after the close of the core trading session on the NYSE Arca on the day the order is placed.


8





USHO receives or pays the proceeds from units sold or redeemed within three business days after the trade date of the purchase or redemption.  The amounts due from Authorized Purchasers are reflected in USHO’s condensed statement of financial condition as receivable for units sold, and amounts payable to Authorized Purchasers upon redemption are reflected as payable for units redeemed.





Partnership Capital and Allocation of Partnership Income and Losses





Profit or loss shall be allocated among the partners of USHO in proportion to the number of units each partner holds as of the close of each month.  USCF may revise, alter or otherwise modify this method of allocation as described in the LP Agreement.





Calculation of Net Asset Value





USHO’s net asset value is calculated on each NYSE Arca trading day by taking the current market value of its total assets, subtracting any liabilities and dividing the amount by the total number of units issued and outstanding. USHO uses the closing price for the contracts on the relevant exchange on that day to determine the value of contracts held on such exchange.





Net Income (Loss) per Unit





Net income (loss) per unit is the difference between the net asset value per unit at the beginning of each period and at the end of each period.  The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit.  The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units redeemed based on the amount of time the units were outstanding during such period.  There were no units held by USCF at March 31, 2011.





Offering Costs





Offering costs incurred in connection with the registration of additional units after the initial registration of units are borne by USHO.  These costs include registration fees paid to regulatory agencies and all legal, accounting, printing and other expenses associated with such offerings.  These costs are accounted for as a deferred charge and thereafter amortized to expense over twelve months on a straight-line basis or a shorter period if warranted.





Cash Equivalents





Cash equivalents include money market funds and overnight deposits or time deposits with original maturity dates of three months or less.





Reclassification





Certain amounts in the accompanying condensed financial statements were reclassified to conform with the current presentation.





Use of Estimates





The preparation of condensed financial statements in conformity with GAAP requires USHO’s management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements, and the reported amounts of the revenue and expenses during the reporting period.  Actual results may differ from those estimates and assumptions.





NOTE 3 - FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS





USCF Management Fee





Under the LP Agreement, USCF is responsible for investing the assets of USHO in accordance with the objectives and policies of USHO.  In addition, USCF has arranged for one or more third parties to provide administrative, custody, accounting, transfer agency and other necessary services to USHO.  For these services, USHO is contractually obligated to pay USCF a fee, which is paid monthly, equal to 0.60% per annum of average daily net assets.


9





Ongoing Registration Fees and Other Offering Expenses





USHO pays all costs and expenses associated with the ongoing registration of its units subsequent to the initial offering.  These costs include registration or other fees paid to regulatory agencies in connection with the offer and sale of units, and all legal, accounting, printing and other expenses associated with such offer and sale.For the three months ended March 31, 2011 and 2010, USHO incurred $1,800 and $360, respectively, in registration fees and other offering expenses.




Directors’ Fees and Expenses




USHO is responsible for paying its portion of the directors’ and officers’ liability insurance of all affiliated funds for which USCF serves as general partner or sponsor (all affiliated funds including USCI) and the fees and expenses of the independent directors who also serve as audit committee members of those affiliated USCF funds organized as limited partnerships (all affiliated funds, excluding USCI).  Effective as of April 1, 2010, USHO became responsible for paying its portion of any payments that may become due to the independent directors pursuant to the deferred compensation agreements entered into between the independent directors, USCF and each of the affiliated funds, except USCI.  USHO shares all director fees and expenses, including any that may become due pursuant to the deferred compensation agreements, with all the affiliated funds, except USCI, based on the relative assets of each fund, computed on a daily basis.  These fees and expenses for the affiliated funds, as described above, for the year ending December 31, 2011, are estimated to be a total of $540,000.





Licensing Fees




As discussed in Note 4 below, USHO entered into a licensing agreement with the NYMEX on May 30, 2007. Pursuant to the agreement, USHO and the affiliated funds managed by USCF, other than USBO and USCI, pay a licensing fee that is equal to 0.04% for the first $1,000,000,000 of combined assets of the funds and 0.02% for combined assets above $1,000,000,000.  During the three months ended March 31, 2011 and 2010, USHO incurred $672 and $864, respectively, under this arrangement.





Investor Tax Reporting Cost





The fees and expenses associated with USHO’s audit expenses and tax accounting and reporting requirements are paid by USHO.  These costs are estimated to be $200,000 for the year ending December 31, 2011.





Other Expenses and Fees and Expense Waivers





In addition to the fees described above, USHO pays all brokerage fees and other expenses in connection with the operation of USHO, excluding costs and expenses paid by USCF as outlined in Note 4 below.  USCF, though under no obligation to do so, agreed to pay certain costs for tax reporting and audit expenses normally borne by USHO, to the extent that such expenses exceed 0.15% (15 basis points) of USHO’s NAV, on an annualized basis, through at least June 30, 2011.  USCF has no obligation to continue such payments into subsequent periods.





NOTE 4 - CONTRACTS AND AGREEMENTS





USHO is party to a marketing agent agreement, dated as of March 10, 2008, as amended from time to time, with the Marketing Agent and USCF, whereby the Marketing Agent provides certain marketing services for USHO as outlined in the agreement.  The fee of the Marketing Agent, which is borne by USCF, is equal to 0.06% on USHO’s assets up to $3 billion and 0.04% on USHO’s assets in excess of $3 billion.





The above fee does not include the following expenses, which are also borne by USCF: the cost of placing advertisements in various periodicals; web construction and development; or the printing and production of various marketing materials.


10





USHO is also party to a custodian agreement, dated March 13, 2008, as amended from time to time, with Brown Brothers Harriman & Co. (“BBH&Co.”) and USCF, whereby BBH&Co. holds investments on behalf of USHO.  USCF pays the fees of the custodian, which are determined by the parties from time to time.  In addition, USHO is party to an administrative agency agreement, dated February 7, 2008, as amended from time to time, with USCF and BBH&Co., whereby BBH&Co. acts as the administrative agent, transfer agent and registrar for USHO.  USCF also pays the fees of BBH&Co. for its services under such agreement and such fees are determined by the parties from time to time.





Currently, USCF pays BBH&Co. for its services, in the foregoing capacities, a minimum amount of $75,000 annually for its custody, fund accounting and fund administration services rendered to USHO and each of the affiliated funds managed by USCF, as well as a $20,000 annual fee for its transfer agency services.  In addition, USCF pays BBH&Co. an asset-based charge of: (a) 0.06% for the first $500 million of USHO’s, USOF’s, USNG’s, US12OF’s, UGA’s, USSO’s, US12NG’s, USBO’s and USCI’s combined net assets, (b) 0.0465% for USHO’s, USOF’s, USNG’s, US12OF’s, UGA’s, USSO’s, US12NG’s, USBO’s and USCI’s combined net assets greater than $500 million but less than $1 billion, and (c) 0.035% once USHO’s, USOF’s, USNG’s, US12OF’s, UGA’s, USSO’s, US12NG’s, USBO’s and USCI’s combined net assets exceed $1 billion.  The annual minimum amount will not apply if the asset-based charge for all accounts in the aggregate exceeds $75,000.  USCF also pays transaction fees ranging from $7 to $15 per transaction.





USHO has entered into a brokerage agreement with UBS Securities LLC (“UBS Securities”).  The agreement requires UBS Securities to provide services to USHO in connection with the purchase and sale of Futures Contracts and Other Heating Oil-Related Investments that may be purchased and sold by or through UBS Securities for USHO’s account.  In accordance with the agreement, UBS Securities charges USHO commissions of approximately $7 to $15 per round-turn trade, including applicable exchange and NFA fees for Futures Contracts and options on Futures Contracts.





On May 30, 2007, USHO and the NYMEX entered into a licensing agreement whereby USHO was granted a non-exclusive license to use certain of the NYMEX’s settlement prices and service marks.  Under the licensing agreement, USHO and the affiliated funds managed by USCF, other than USBO and USCI, pay the NYMEX an asset-based fee for the license, the terms of which are described in Note 3.





USHO expressly disclaims any association with the NYMEX or endorsement of USHO by the NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are registered trademarks of the NYMEX.





NOTE 5 - FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES





USHO engages in the trading of futures contracts and options on futures contracts (collectively, “derivatives”). USHO is exposed to both market risk, which is the risk arising from changes in the market value of the contracts, and credit risk, which is the risk of failure by another party to perform according to the terms of a contract.





USHO may enter into futures contracts and options on futures contracts to gain exposure to changes in the value of an underlying commodity.  A futures contract obligates the seller to deliver (and the purchaser to accept) the future delivery of a specified quantity and type of a commodity at a specified time and place.  Some futures contracts may call for physical delivery of the asset, while others are settled in cash.  The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying commodity or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery.





The purchase and sale of futures contracts and options on futures contracts require margin deposits with a futures commission merchant.  Additional deposits may be necessary for any loss on contract value.  The Commodity Exchange Act requires a futures commission merchant to segregate all customer transactions and assets from the futures commission merchant’s proprietary activities.


11


Futures contracts involve, to varying degrees, elements of market risk (specifically commodity price risk) and exposure to loss in excess of the amount of variation margin.  The face or contract amounts reflect the extent of the total exposure USHO has in the particular classes of instruments.  Additional risks associated with the use of futures contracts are an imperfect correlation between movements in the price of the futures contracts and the market value of the underlying securities and the possibility of an illiquid market for a futures contract.





Through March 31, 2011, all of the futures contracts held by USHO were exchange-traded.  The risks associated with exchange-traded contracts are generally perceived to be less than those associated with over-the-counter transactions since, in over-the-counter transactions, a party must rely solely on the credit of its respective individual counterparties.  However, in the future, if USHO were to enter into non-exchange traded contracts, it would be subject to the credit risk associated with counterparty non-performance.  The credit risk from counterparty non-performance associated with such instruments is the net unrealized gain, if any, on the transaction.  USHO has credit risk under its futures contracts since the sole counterparty to all domestic and foreign futures contracts is the clearinghouse for the exchange on which the relevant contracts are traded.  In addition, USHO bears the risk of financial failure by the clearing broker.





USHO’s cash and other property, such as U.S. Treasuries, deposited with a futures commission merchant are considered commingled with all other customer funds, subject to the futures commission merchant’s segregation requirements.  In the event of a futures commission merchant’s insolvency, recovery may be limited to a pro rata share of segregated funds available.  It is possible that the recovered amount could be less than the total of cash and other property deposited.  The insolvency of a futures commission merchant could result in the complete loss of USHO’s assets posted with that futures commission merchant; however, the vast majority of USHO’s assets are held in U.S. Treasuries, cash and/or cash equivalents with USHO’s custodian and would not be impacted by the insolvency of a futures commission merchant.  Also, the failure or insolvency of USHO’s custodian could result in a substantial loss of USHO’s assets.





USCF invests a portion of USHO’s cash in money market funds that seek to maintain a stable net asset value.  USHO is exposed to any risk of loss associated with an investment in these money market funds.  As of March 31, 2011 and December 31, 2010, USHO had deposits in domestic and foreign financial institutions,including cash investments in money market funds, in the amounts of $10,499,603 and $11,445,529, respectively.  This amount is subject to loss should these institutions cease operations.





For derivatives, risks arise from changes in the market value of the contracts.  Theoretically, USHO is exposed to market risk equal to the value of futures contracts purchased and unlimited liability on such contracts sold short.  As both a buyer and a seller of options, USHO pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option.





USHO’s policy is to continuously monitor its exposure to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting controls and procedures.  In addition, USHO has a policy of requiring review of the credit standing of each broker or counterparty with which it conducts business.





The financial instruments held by USHO are reported in its condensed statement of financial condition at market or fair value, or at carrying amounts that approximate fair value, because of their highly liquid nature and short-term maturity.




12


NOTE 6 – FINANCIAL HIGHLIGHTS





The following table presents per unit performance data and other supplemental financial data for the three months ended March 31, 2011 and 2010 for the unitholders.  This information has been derived from information presented in the condensed financial statements.





For the three months

ended


For the three months

endedMarch 31, 2011


March 31, 2010(Unaudited)


(Unaudited)Per Unit Operating Performance:Net asset value, beginning of period

$
29.82


$
27.54Total income


6.44



0.37Total expenses


(0.07
)


(0.06
)Net increase in net asset value


6.37



0.31Net asset value, end of period

$
36.19


$
27.85Total Return


21.36
%


1.13
%Ratios to Average Net AssetsTotal income


19.19
%


0.62
%Management fees*


0.60
%


0.60
%Total expenses excluding management fees*


1.95
%


2.45
%Expenses waived*


(1.63
)%


(2.17
)%Net expenses excluding management fees*


0.32
%


0.28
%Net income


18.97
%


0.41
%*Annualized





Total returns are calculated based on the change in value during the period.  An individual unitholder’s total return and ratio may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from USHO.





NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS





USHO values its investments in accordance with Accounting Standards Codification 820 – Fair Value Measurements and Disclosures (“ASC 820”).  ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement.  The changes to past practice resulting from the application of ASC 820 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurement.  ASC 820 establishes a fair value hierarchy that distinguishes between: (1) market participant assumptions developed based on market data obtained from sources independent of USHO (observable inputs) and (2) USHO’s own assumptions about market participant assumptions developed based on the best information available under the circumstances (unobservable inputs).  The three levels defined by the ASC 820 hierarchy are as follows:




Level I – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.




Level II – Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly.  Level II assets include the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).




Level III – Unobservable pricing input at the measurement date for the asset or liability.  Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.




In some instances, the inputs used to measure fair value might fall within different levels of the fair value hierarchy.  The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair value measurement in its entirety.






13








At December 31, 2010

Total


Level I


Level II


Level IIIShort-Term Investments

$
9,307,152


$
9,307,152


$
-


$
-Exchange-Traded Futures ContractsUnited States Contracts


267,658



267,658



-



-





During the year ended December 31, 2010, there were no significant transfers between Level I and Level II.




The following table summarizes the valuation of USHO’s securities at March 31, 2011 using the fair value hierarchy:




At March 31, 2011

Total


Level I


Level II


Level IIIShort-Term Investments

$
8,807,998


$
8,807,998


$
-


$
-Exchange-Traded Futures ContractsUnited States Contracts


132,468



132,468



-



-





During the three months ended March 31, 2011, there were no significant transfers between Level I and Level II.





Effective January 1, 2009, USHO adopted the provisions of Accounting Standards Codification 815 — Derivatives and Hedging, which require presentation of qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivatives.





Fair Value of Derivative Instruments





Derivatives notAccounted for as

Condensed Statement of

Fair Value At

Fair Value AtHedging Instruments

Financial Condition

March 31, 2011

December 31, 2010Futures -Commodity Contracts

Assets

$
132,468

$
267,658




The Effect of Derivative Instruments on the Condensed Statements of Operations





For the three months ended


For the three months endedMarch 31, 2011


March 31, 2010Location of

Realized


Change in


Realized


Change inGain or (Loss)

Gain or (Loss)


Unrealized


Gain or (Loss)


UnrealizedDerivatives not

on Derivatives

on Derivatives


Gain or (Loss)


on Derivatives


Gain or (Loss)Accountedfor as

Recognized

Recognized


Recognized


Recognized


RecognizedHedging Instruments

in Income

in Income


in Income


in Income


in IncomeFutures -

Realized gain

$
2,286,585






$
1,003,518CommodityContracts

on closed positionsChange in





$
(135,190
)





$
(911,123
)unrealized losson open positions




NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS





In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”)No. 2010-06 “Improving Disclosures about Fair Value Measurements.”  ASU No. 2010-06 clarifies existing disclosure andrequires additional disclosures regarding fair value measurements.  Effective for fiscal years beginningafter December 15, 2010, and for interim periods within those fiscal years, entities will need to disclose informationabout purchases, sales, issuances and settlements of Level 3 securities on a gross basis, rather than as a net number ascurrently required.  The implementation of ASU No. 2010-06 is not expected to have a material impact on USHO’s financial statementdisclosures.


NOTE 9 – SUBSEQUENT EVENTS





USHO has performed an evaluation of subsequent events through the date the financial statements were issued.  This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.


14





Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.




The following discussion should be read in conjunction with the condensed financial statements and the notes thereto of the United States Heating Oil Fund, LP (“USHO”) included elsewhere in this quarterly report on Form 10-Q.




Forward-Looking Information




This quarterly report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding the plans and objectives of management for future operations.  This information may involve known and unknown risks, uncertainties and other factors that may cause USHO’s actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements.  Forward-looking statements, which involve assumptions and describe USHO’s future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project,” the negative of these words, other variations on these words or comparable terminology.  These forward-looking statements are based on assumptions that may be incorrect, and USHO cannot assure investors that the projections included in these forward-looking statements will come to pass.  USHO’s actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.




USHO has based the forward-looking statements included in this quarterly report on Form 10-Q on information available to it on the date of this quarterly report on Form 10-Q, and USHO assumes no obligation to update any such forward-looking statements.  Although USHO undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, investors are advised to consult any additional disclosures that USHO may make directly to them or through reports that USHO in the future files with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.





Introduction





USHO, a Delaware limited partnership, is a commodity pool that issues units that may be purchased and sold on the NYSE Arca, Inc. (the “NYSE Arca”).  The investment objective of USHO is for the daily changes in percentage terms of its units’ net asset value (“NAV”) to reflect the daily changes in percentage terms of the spot price of heating oil, as measured by the changes in the price of the futures contract for heating oil (also known as No. 2 fuel oil), for delivery to the New York harbor, traded on the New York Mercantile Exchange (the “NYMEX”) that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire, less USHO’s expenses.  It is not the intent of USHO to be operated in a fashion such that the NAV will equal, in dollar terms, the spot price of heating oil or any particular futures contract based on heating oil.





USHO invests in futures contracts for heating oil, crude oil, gasoline, natural gas and other petroleum-based fuels that are traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges (collectively, “Futures Contracts”) and other heating oil-related investments such as cash-settled options on Futures Contracts, forward contracts for heating oil, cleared swap contracts and over-the-counter transactions that are based on the price of heating oil, crude oil and other petroleum-based fuels, Futures Contracts and indices based on the foregoing (collectively, “Other Heating Oil-Related Investments”).  For convenience and unless otherwise specified, Futures Contracts and Other Heating Oil-Related Investments collectively are referred to as “Heating Oil Interests” in this quarterly report on Form 10-Q.





USHO seeks to achieve its investment objective by investing in a combination of Futures Contracts and Other Heating Oil-Related Investments such that daily changes in its NAV, measured in percentage terms, will closely track the daily changes in the price of the Benchmark Futures Contract, also measured in percentage terms.  The general partner of USHO, United States Commodity Funds, LLC (“USCF”) believes the daily changes in the price of the Benchmark Futures Contract have historically exhibited a close correlation with the daily changes in the spot price of heating oil.  USCF believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in Futures Contracts and Other Heating Oil-Related Investments.


15





On any valuation day, the Benchmark Futures Contract is the near month futures contract for heating oil traded on the NYMEX unless the near month contract is within two weeks of expiration in which case the Benchmark Futures Contract becomes the next month contract for heating oil traded on the NYMEX.  “Near month contract” means the next contract traded on the NYMEX due to expire.  “Next month contract” means the first contract traded on the NYMEX due to expire after the near month contract.





The regulation of commodity interests in the United States is a rapidly changing area of law and is subject to ongoing modification by governmental and judicial action.  On July 21, 2010, a broad financial regulatory reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), was signed into law that includes provisions altering the regulation of commodity interests.  Provisions in the new law include the requirement that position limits be established on a wide range of commodity interests including energy-based and other commodity futures contracts, certain cleared commodity swaps and certain over-the-counter commodity contracts; new registration, recordkeeping, capital and margin requirements for “swap dealers” and “major swap participants” as determined by the new law and applicable regulations; and the forced use of clearinghouse mechanisms for most swap transactions that are currently entered into in the over-the-counter market.  The new law and the rules that are currently being and are expected to be promulgated thereunder may negatively impact USHO’s ability to meet its investment objective either through limits or requirements imposed on it or upon its counterparties.  Further, increased regulation of, and the imposition of additional costs on, swap transactions under the new legislation and implementing regulations could cause a reduction in the swap market and the overall derivatives markets, which could restrict liquidity and adversely affect USHO.  In particular, new position limits imposed on USHO or its counterparties may impact USHO’s ability to invest in a manner that most efficiently meets its investment objective, and new requirements, including capital and mandatory clearing, may increase the cost of USHO’s investments and doing business, which could adversely affect USHO’s investors.





Additionally, the Dodd-Frank Act requires the U.S. Commodity Futures Trading Commission (the “CFTC”) to promulgate rules establishing position limits for futures and options contracts on commodities, as well as for swaps that are economically equivalent to futures or options.  On January 13, 2011, the CFTC proposed new rules, which if implemented in their proposed form, would establish position limits and limit formulas for certain physical commodity futures, including Futures Contracts and options on Futures Contracts, executed pursuant to the rules of designated contract markets (i.e., certain regulated exchanges) and commodity swaps that are economically equivalent to such futures and options contracts.  The CFTC has also proposed aggregate position limits that would apply across different trading venues to contracts based on the same underlying commodity.  At this time, it is unknown precisely when such position limits would take effect.  The CFTC’s position limits for futures contracts held during the last few days of trading in the near month contract to expire, which, under the CFTC’s proposed rule would be substantially similar to the position limits currently set by the exchanges, could take effect as early as Spring 2011.  Based on the CFTC’s current proposal, other position limits would not take effect until March 2012 or later.





On April 12, 2011, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit System and the Federal Housing Finance Agency (collectively, the “Prudential Regulators”) and the CFTC issued proposed rules establishing minimum initial and variation margin collection requirements for certain swap dealers and major swap participants (collectively, “Covered Swap Entities”), which if adopted, would require Covered Swap Entities to collect minimum initial and variation margin amounts from swap counterparties.  The Prudential Regulators’ proposed rules would apply to those Covered Swap Entities that are regulated by the Prudential Regulators and the CFTC’s proposed rules would apply to Covered Swap Entities that are not regulated by the Prudential Regulators.





The amount of initial and variation margin that Covered Swap Entities would be required to collect under the proposed rules varies based on whether their counterparty to a particular swap is (1) a Covered Swap Entity, (2) a “high-risk” financial entity end-user, (3) a “low-risk” financial entity end-user (e.g.,financial entities subject to capital requirements imposed by bank or insurance regulators, that predominantly use swaps to hedge and that do not have significant swap exposure) or (4) a non-financial end-user.  With certain exceptions not applicable to USHO and the affiliated funds managed by USCF, Covered Swap Entities would not be required to post initial or variation margin to any of their counterparties except for other Covered Swap Entities.


16





Covered Swap Entities and all financial entity end-users would be required to post initial margin and variation margin when they enter into swaps with Covered Swap Entities.  Margin posted by “low-risk” financial entity end-users could be subject to thresholds under the proposed rules.  As commodity pools, USHO and the affiliated funds managed by USCF would be “high-risk” financial entity end-users and would therefore have to post margin without thresholds.





On April 27, 2011, the CFTC and the SEC proposed joint rules defining “swaps” and “security-based swaps,” thus providing more clarity regarding which transactions will be regulated as such under the Dodd-Frank Act.  The rules proposed in April 2011 are currently open to the public for comment at the time of the filing of this quarterly report on Form 10-Q.  The CFTC has now issued proposed versions of all of the rules it is required to promulgate under the Dodd-Frank Act but, with one exception not applicable to USHO and the affiliated funds managed by USCF, the CFTC has not promulgated any final rules or indicated when such final rules would take effect. The effect of the future regulatory change on USHO is impossible to predict, but it could be substantial and adverse.





USCF, which is registered as a commodity pool operator (“CPO”) with the CFTC, is authorized by the Amended and Restated Agreement of Limited Partnership of USHO (the “LP Agreement”) to manage USHO.  USCF is authorized by USHO in its sole judgment to employ and establish the terms of employment for, and termination of, commodity trading advisors or futures commission merchants.





Price Movements





Heating oil futures prices exhibited moderate daily swings during the three months ended March 31, 2011 along with a general upward trend.  The price of the Benchmark Futures Contract started the period at $2.5424 per gallon.  It hit a peak on March 31, 2011 at a price of $3.11 per gallon.  The low of the period was on January 7, 2011 when the price dropped to $2.4863 per gallon.  The period ended with the Benchmark Futures Contract at $3.1125 per gallon, up approximately 22.42% over the period.  USHO’s NAV began the period at $29.82 per unit and reached its high for the period on March 31, 2011 at $36.19 per unit.  USHO’s NAV reached its low for the period on January 7, 2011 at $29.16 per unit. USHO’s NAV on March 31, 2011 was $36.19, up approximately 21.36% for the period.  The Benchmark Futures Contract prices listed above began with the February 2011 contract and ended with the May, 2011 contract.  The return of approximately 22.42% on the Benchmark Futures Contract listed above is a hypothetical return only and could not actually be achieved by an investor holding Futures Contracts.  An investment in heating oil Futures Contracts would need to be rolled forward during the time period described in order to achieve such a result.  Furthermore, the change in the nominal price of these differing heating oil Futures Contracts, measured from the start of the period to the end of the period, does not represent the actual benchmark results that USHO seeks to track, which are more fully described below in the section titled “Tracking USHO’s Benchmark”.





During the three months ended March 31, 2011, the heating oil futures market was in a state of contango, with the exception of a brief period in early February 2011, meaning that the price of the near month heating oil Futures Contract was typically lower than the price of the next month heating oil Futures Contract, or contracts further away from expiration.   A backwardation market is one in which the price of the near month heating oil Futures Contract is higher than the price of the next month heating oil Futures Contract, or contracts further away from expiration.  For a discussion of the impact of backwardation and contango on total returns, see “Term Structure of Heating Oil Futures Prices and the Impact on Total Returns” below.





Valuation of Futures Contracts and the Computation of the NAV





The NAV of USHO units is calculated once each NYSE Arca trading day.  The NAV for a particular trading day is released after 4:00 p.m. New York time.  Trading during the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York time. USHO’s administrator uses the NYMEX closing price (determined at the earlier of the close of the NYMEX or 2:30 p.m. New York time) for the contracts held on the NYMEX, but calculates or determines the value of all other USHO investments, including ICE Futures contracts or other futures contracts, as of the earlier of the close of the NYSE Arca or 4:00 p.m. New York time.


17





Results of Operations and the Heating Oil Market





Results of Operations.On April 9, 2008, USHO listed its units on the American Stock Exchange (the “AMEX”) under the ticker symbol “UHN.”  On that day, USHO established its initial offering price at $50.00 per unit and issued 200,000 units to the initial authorized purchaser, Merrill Lynch Professional Clearing Corp., in exchange for $10,001,000 in cash.  As a result of the acquisition of the AMEX by NYSE Euronext, USHO’s units no longer trade on the AMEX and commenced trading on the NYSE Arca on November 25, 2008.





Since its initial offering of 10,000,000 units, USHO registered an additional 50,000,000 units with the SEC on April 30, 2010.  Units offered by USHO in the subsequent offering were sold by it for cash at the units’ NAV as described in the applicable prospectus.  As of March 31, 2011, USHO had issued 900,000 units, 300,000 of which were outstanding.  As of March 31, 2011, there were 59,100,000 units registered but not yet issued.




More units may have been issued by USHO than are outstanding due to the redemption of units.  Unlike funds that are registered under the Investment Company Act of 1940, as amended, units that have been redeemed by USHO cannot be resold by USHO.  As a result, USHO contemplates that additional offerings of its units will be registered with the SEC in the future in anticipation of additional issuances and redemptions.





For the Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010





As of March 31, 2011, the total unrealized gain on Futures Contracts owned or held on that day was $132,468, and USHO established cash deposits, including cash investments in money market funds, that were equal to $10,499,603.  USHO held 91.25% of its cash assets in overnight deposits and money market funds at its custodian bank, while 8.75% of the cash balance was held as margin deposits for the Futures Contracts purchased.  The ending per unit NAV on March 31, 2011 was $36.19.





By comparison, as of March 31, 2010, the total unrealized gain on Futures Contracts owned or held on that day was $177,089, and USHO established cash deposits, including cash investments in money market funds, that were equal to $13,563,849.  USHO held 83.18% of its cash assets in overnight deposits and money market funds at its custodian bank, while 16.82% of the cash balance was held as margin deposits for the Futures Contracts purchased.  The ending per unit NAV on March 31, 2010 was $27.85.  The increase in the per unit NAV for March 31, 2011, as compared to March 31, 2010, was primarily a result of an increase in the value of the Benchmark Futures Contracts that USHO had invested in between the period ended March 31, 2010 and the period ended March 31, 2011.





Portfolio Expenses. USHO’s expenses consist of investment management fees, brokerage fees and commissions, certain offering costs, licensing fees, the fees and expenses of the independent directors of USCF and expenses relating to tax accounting and reporting requirements.  The management fee that USHO pays to USCF is calculated as a percentage of the total net assets of USHO.  USHO pays USCF a management fee of 0.60% of its average net assets.  The fee is accrued daily and paid monthly.





During the three months ended March 31, 2011, the daily average total net assets of USHO were $11,217,697.  The management fee incurred by USHO during the period amounted to $16,596.  By comparison, during the three months ended March 31, 2010, the daily average total net assets of USHO were $15,083,361.  The management fee paid by USHO during the period amounted to $22,315.





In addition to the management fee, USHO pays all brokerage fees and other expenses, including certain tax reporting costs, licensing fees for the use of intellectual property, ongoing registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”) and any other regulatory agency in connection with offers and sales of its units subsequent to the initial offering and all legal, accounting, printing and other expenses associated therewith.  The total of these fees and expenses for the three months ended March 31, 2011 was $8,937, as compared to $10,599 for the three months ended March 31, 2010.  The decrease in expenses for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010, was primarily due to the relative size of USHO and activity that resulted from its decreased size, including reduced costs associated with the registration and the offering of additional units, decreased brokerage fees, decreased licensing fees and decreased tax reporting costs during the three months ended March 31, 2011.  USHO incurred $1,800 and $360 in fees and other expenses relating to the registration and offering of additional units during the three months ended March 31, 2011 and 2010, respectively.  During the three months ended March 31, 2011 and 2010, an expense waiver was in effect which offset certain of the expenses incurred by USHO.  The total amount of the expense waiver was $45,171 for the three months ended March 31, 2011 and $80,621 for the three months ended March 31, 2010.  For the three months ended March 31, 2011 and March 31, 2010, the expenses of USHO, including management fees, commissions, and all other expenses, before allowance for the expense waiver, totaled $70,704 and $113,535, respectively, and after allowance for the expense waiver, totaled $25,533 and $32,914, respectively.


18





USHO is responsible for paying its portion of the directors’ and officers’ liability insurance of all affiliated funds for which USCF serves as general partner and sponsor (all affiliated funds including the United States Commodity Index Fund (“USCI”)) and the fees and expenses of the independent directors who also serve as audit committee members of those affiliated USCF funds organized as limited partnerships (all affiliated funds, excluding USCI).  Affiliated funds of USHO include the United States Oil Fund, LP (“USOF”), the United States Natural Gas Fund, LP (“USNG”), the United States 12 Month Oil Fund, LP (“US12OF”), the United States Gasoline Fund, LP (“UGA”), the United States Short Oil Fund, LP (“USSO”), the United States 12 Month Natural Gas Fund, LP (“US12NG”), the United States Brent Oil Fund, LP (“USBO”) and USCI.  USHO shares the fees and expenses with each affiliated fund, as described above, based on the relative assets of each fund computed on a daily basis.  These fees and expenses for the year ending December 31, 2011 are estimated to be a total of $540,000 for all affiliated funds.  By comparison, for the year ended December 31, 2010, these fees and expenses amounted to a total of $1,107,140 for all affiliated funds, and USHO’s portion of such fees and expenses was $2,864.  Effective as of April 1, 2010, USHO became responsible for paying its portion of any payments that may become due to the independent directors pursuant to the deferred compensation agreements entered into between the independent directors, USCF and the affiliated funds, except USCI.





USHO also incurs commissions to brokers for the purchase and sale of Futures Contracts, Other Heating Oil-Related Investments or short-term obligations of the United States of two years or less (“Treasuries”).  During the three months ended March 31, 2011, total commissions paid to brokers amounted to $1,799.  By comparison, during the three months ended March 31, 2010, total commissions paid to brokers amounted to $3,572.  The decrease in the total commissions paid to brokers for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 was primarily a function of fewer Futures Contracts traded during the three months ended March 31, 2011. As an annualized percentage of total net assets, the figure for the three months ended March 31, 2011 represents approximately 0.06% of total net assets.  By comparison, the figure for the three months ended March 31, 2010 represented approximately 0.10% of total net assets.  However, there can be no assurance that commission costs and portfolio turnover will not cause commission expenses to rise in future quarters.





The fees and expenses associated with USHO’s audit expenses and tax accounting and reporting requirements are paid by USHO.  These costs are estimated to be $200,000 for the year ending December 31, 2011.  USCF, though under no obligation to do, agreed to pay certain costs for tax reporting and audit expenses normally borne by USHO, to the extent that such expenses exceed 0.15% (15 basis points) of USHO's NAV, on an annualized basis, through at least June 30, 2011.  USCF has no obligation to continue such payments into subsequent periods.





Dividend and Interest Income. USHO seeks to invest its assets such that it holds Futures Contracts and Other Heating Oil-Related Investments in an amount equal to the total net assets of its portfolio.  Typically, such investments do not require USHO to pay the full amount of the contract value at the time of purchase, but rather require USHO to post an amount as a margin deposit against the eventual settlement of the contract.  As a result, USHO retains an amount that is approximately equal to its total net assets, which USHO invests in Treasuries, cash and/or cash equivalents.  This includes both the amount on deposit with the futures commission merchant as margin, as well as unrestricted cash and cash equivalents held with USHO’s custodian bank.  The Treasuries, cash and/or cash equivalents earn income that accrues on a daily basis.  For the three months ended March 31, 2011, USHO earned $834 in dividend and interest income on such cash and/or cash equivalents.  Based on USHO’s average daily total net assets, this was equivalent to an annualized yield of 0.03%.  USHO did not purchase Treasuries during the three months ended March 31, 2011 and held only cash and/or cash equivalents during this time period.  By comparison, for the three months ended March 31, 2010, USHO earned $873 in dividend and interest income on such cash and/or cash equivalents.  Based on USHO’s average daily total net assets, this was equivalent to an annualized yield of 0.02%.  USHO did not purchase Treasuries during the three months ended March 31, 2010 and held only cash and/or cash equivalents during this time period.  Interest rates on short-term investments, including cash, cash equivalents and Treasuries, were slightly higher during the three months ended March 31, 2011 compared to the three months ended March 31, 2010.  As a result, the amount of income earned by USHO as a percentage of total net assets was higher during the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.


19





Tracking USHO’s Benchmark





USCF seeks to manage USHO’s portfolio such that changes in its average daily NAV, on a percentage basis, closely track the changes in the average daily price of the Benchmark Futures Contract, also on a percentage basis.  Specifically, USCF seeks to manage the portfolio such that over any rolling period of 30 valuation days, the average daily change in USHO’s NAV is within a range of 90% to 110% (0.9 to 1.1) of the average daily change in the price of the Benchmark Futures Contract.  As an example, if the average daily movement of the price of the Benchmark Futures Contract for a particular 30-valuation day time period was 0.5% per day, USCF would attempt to manage the portfolio such that the average daily movement of the NAV during that same time period fell between 0.45% and 0.55% (i.e., between 0.9 and 1.1 of the benchmark’s results).  USHO’s portfolio management goals do not include trying to make the nominal price of USHO’s NAV equal to the nominal price of the current Benchmark Futures Contract or the spot price for heating oil.  USCF believes that it is not practical to manage the portfolio to achieve such an investment goal when investing in listed heating oil Futures Contracts.





For the 30 valuation days ended March 31, 2011, the simple average daily change in the Benchmark Futures Contract was 0.378%, while the simple average daily change in the NAV of USHO over the same time period was 0.373%.  The average daily difference was -0.006% (or -0.6 basis points, where 1 basis point equals 1/100 of 1%).  As a percentage of the daily movement of the Benchmark Futures Contract, the average error in daily tracking by the NAV was 0.267%, meaning that over this time period USHO’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal.  The first chart below shows the daily movement of USHO’s NAV versus the daily movement of the Benchmark Futures Contract for the 30-valuation day period ended March 31, 2011.  The second chart below shows the monthly total returns of USHO as compared to the monthly value of the Benchmark Futures Contract since inception.





Since the commencement of the offering of USHO’s units to the public on April 9, 2008 to March 31, 2011, the simple average daily change in the Benchmark Futures Contract was -0.011%, while the simple average daily change in the NAV of USHO over the same time period was -0.012%.  The average daily difference was -0.001% (or -0.1 basis points, where 1 basis point equals 1/100 of 1%).  As a percentage of the daily movement of the Benchmark Futures Contract, the average error in daily tracking by the NAV was -0.592%, meaning that over this time period USHO’s tracking error was within the plus or minus 10% range established as its benchmark tracking goal.


20











*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS


21








*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





An alternative tracking measurement of the return performance of USHO versus the return of its Benchmark Futures Contract can be calculated by comparing the actual return of USHO, measured by changes in its NAV, versus the expected changes in its NAV under the assumption that USHO’s returns had been exactly the same as the daily changes in its Benchmark Futures Contract.





For the three months ended March 31, 2011, the actual total return of USHO as measured by changes in its NAV was 21.36%.  This is based on an initial NAV of $29.82 on December 31, 2010 and an ending NAV as of March 31, 2011 of $36.19.  During this time period, USHO made no distributions to its unitholders.  However, if USHO’s daily changes in its NAV had instead exactly tracked the changes in the daily return of the Benchmark Futures Contract, USHO would have had an estimated NAV of $36.29 as of March 31, 2011, for a total return over the relevant time period of 21.70%.  The difference between the actual NAV total return of USHO of 21.36% and the expected total return based on the Benchmark Futures Contract of 21.70% was an error over the time period of -0.337%, which is to say that USHO’s actual total return underperformed the benchmark result by that percentage.  USCF believes that a portion of the difference between the actual return and the expected benchmark return can be attributed to the net impact of the expenses that USHO pays, offset in part by the income that USHO collects on its cash and cash equivalent holdings.  During the three months ended March 31, 2011, USHO received dividend and interest income of $834, which is equivalent to a weighted average income rate of 0.03% for such period.  In addition, during the three months ended March 31, 2011, USHO also collected $1,000 from its Authorized Purchasers for creating or redeeming baskets of units.  This income also contributed to USHO’s actual return.  During the three months ended March 31, 2011, USHO incurred net expenses of $25,533.  Income from dividends and interest and Authorized Purchaser collections net of expenses was $(23,699), which is equivalent to an annualized weighted average net income rate of (0.86)% for the three months ended March 31, 2011.


22





By comparison, for the three months ended March 31, 2010, the actual total return of USHO as measured by changes in its NAV was 1.13%.  This was based on an initial NAV of $27.54 on December 31, 2009 and an ending NAV as of March 31, 2010 of $27.85.  During this time period, USHO made no distributions to its unitholders. However, if USHO’s daily changes in its NAV had instead exactly tracked the changes in the daily return of the Benchmark Futures Contract, USHO would have had an estimated NAV of $27.90 as of March 31, 2010, for a total return over the relevant time period of 1.32%.  The difference between the actual NAV total return of USHO of 1.13% and the expected total return based on the Benchmark Futures Contract of 1.32% was an error over the time period of 0.19%, which is to say that USHO’s actual total return underperformed the benchmark result by that percentage.  USCF believes that a portion of the difference between the actual return and the expected benchmark return can be attributed to the net impact of the expenses that USHO paid, offset in part by the income that USHO collected on its cash and cash equivalent holdings.  During the three months ended March 31, 2010, USHO received dividend and interest income of $873, which is equivalent to a weighted average income rate of 0.02% for such period.  In addition, during the three months ended March 31, 2010, USHO also collected $1,000 from its Authorized Purchasers for creating or redeeming baskets of units.  This income also contributed to USHO’s actual return.  During the three months ended March 31, 2010, USHO incurred net expenses of $32,914.  Income from dividends and interest and Authorized Purchaser collections net of expenses was $(31,041) which is equivalent to an annualized weighted average net income rate of (0.83)% for the three months ended March 31, 2010.





There are currently three factors that have impacted or are most likely to impact USHO’s ability to accurately track its Benchmark Futures Contract.





First, USHO may buy or sell its holdings in the then current Benchmark Futures Contract at a price other than the closing settlement price of that contract on the day during which USHO executes the trade.  In that case, USHO may pay a price that is higher, or lower, than that of the Benchmark Futures Contract, which could cause the changes in the daily NAV of USHO to either be too high or too low relative to the changes in the Benchmark Futures Contract.  During the three months ended March 31, 2011, USCF attempted to minimize the effect of these transactions by seeking to execute its purchase or sale of the Benchmark Futures Contract at, or as close as possible to, the end of the day settlement price.  However, it may not always be possible for USHO to obtain the closing settlement price and there is no assurance that failure to obtain the closing settlement price in the future will not adversely impact USHO’s attempt to track the Benchmark Futures Contract over time.





Second, USHO earns dividend and interest income on its cash and cash equivalents.  USHO is not required to distribute any portion of its income to its unitholders and did not make any distributions to unitholders during the three months ended March 31, 2011.  Interest payments, and any other income, were retained within the portfolio and added to USHO’s NAV.  When this income exceeds the level of USHO’s expenses for its management fee, brokerage commissions and other expenses (including ongoing registration fees, licensing fees and the fees and expenses of the independent directors of USCF), USHO will realize a net yield that will tend to cause daily changes in the NAV of USHO to track slightly higher than daily changes in the Benchmark Futures Contract.  During the three months ended March 31, 2011, USHO earned, on an annualized basis, approximately 0.03% on its cash holdings.  It also incurred cash expenses on an annualized basis of 0.60% for management fees and approximately 0.06% in brokerage commission costs related to the purchase and sale of futures contracts, and 0.26% for other net expenses.  The foregoing fees and expenses resulted in a net yield on an annualized basis of approximately (0.89)% and affected USHO’s ability to track its benchmark.  If short-term interest rates rise above the current levels, the level of deviation created by the yield would decrease.  Conversely, if short-term interest rates were to decline, the amount of error created by the yield would increase.  When short-term yields drop to a level lower than the combined expenses of the management fee and the brokerage commissions, then the tracking error becomes a negative number and would tend to cause the daily returns of the NAV to underperform the daily returns of the Benchmark Futures Contract.





Third, USHO may hold Other Heating Oil-Related Investments in its portfolio that may fail to closely track the Benchmark Futures Contract’s total return movements.  In that case, the error in tracking the Benchmark Futures Contract could result in daily changes in the NAV of USHO that are either too high, or too low, relative to the daily changes in the Benchmark Futures Contract.  During the three months ended March 31, 2011, USHO did not hold any Other Heating Oil-Related Investments.  If USHO increases in size, and due to its obligations to comply with regulatory limits, USHO may invest in Other Heating Oil-Related Investments, which may have the effect of increasing transaction related expenses and may result in increased tracking error.


23





Term Structure of Heating Oil Futures Prices and the Impact on Total Returns.Several factors determine the total return from investing in a futures contract position.  One factor that impacts the total return that will result from investing in near month heating oil futures contracts and “rolling” those contracts forward each month is the price relationship between the current near month contract and the next month contract.  For example, if the price of the near month contract is higher than the next month contract (a situation referred to as “backwardation” in the futures market), then absent any other change there is a tendency for the price of a next month contract to rise in value as it becomes the near month contract and approaches expiration.  Conversely, if the price of a near month contract is lower than the next month contract (a situation referred to as “contango” in the futures market), then absent any other change there is a tendency for the price of a next month contract to decline in value as it becomes the near month contract and approaches expiration.





As an example, assume that the price of heating oil for immediate delivery (the “spot” price), was $2.00 per gallon, and the value of a position in the near month futures contract was also $2.00.  Over time, the price of a gallon of heating oil will fluctuate based on a number of market factors, including demand for heating oil relative to its supply.  The value of the near month contract will likewise fluctuate in reaction to a number of market factors.  If investors seek to maintain their position in a near month contract and not take delivery of the heating oil, every month they must sell their current near month contract as it approaches expiration and invest in the next month contract.





If the futures market is in backwardation, e.g., when the expected price of heating oil in the future would be less, the investor would be buying a next month contract for a lower price than the current near month contract. Hypothetically, and assuming no other changes to either prevailing heating oil prices or the price relationship between the spot price, the near month contract and the next month contract (and ignoring the impact of commission costs and the income earned on cash and/or cash equivalents), the value of the next month contract would rise as it approaches expiration and becomes the new near month contract.  In this example, the value of the $2.00 investment would tend to rise faster than the spot price of heating oil, or fall slower.  As a result, it would be possible in this hypothetical example for the spot price of heating oil to have risen to $2.50 after some period of time, while the value of the investment in the futures contract would have risen to $2.60, assuming backwardation is large enough or enough time has elapsed.  Similarly, the spot price of heating oil could have fallen to $1.50 while the value of an investment in the futures contract could have fallen to only $1.60.  Over time, if backwardation remained constant, the difference would continue to increase.





If the futures market is in contango, the investor would be buying a next month contract for a higher price than the current near month contract.  Hypothetically, and assuming no other changes to either prevailing heating oil prices or the price relationship between the spot price, the near month contract and the next month contract (and ignoring the impact of commission costs and the income earned on cash and/or cash equivalents), the value of the next month contract would fall as it approaches expiration and becomes the new near month contract.  In this example, it would mean that the value of the $2.00 investment would tend to rise slower than the spot price of heating oil, or fall faster. As a result, it would be possible in this hypothetical example for the spot price of heating oil to have risen to $2.50 after some period of time, while the value of the investment in the futures contract will have risen to only $2.40, assuming contango is large enough or enough time has elapsed.  Similarly, the spot price of heating oil could have fallen to $1.50 while the value of an investment in the futures contract could have fallen to $1.40.  Over time, if contango remained constant, the difference would continue to increase.





The chart below compares the price of the near month contract to the price of the next month contract over the last 10 years (2001-2010) for heating oil.  When the price of the near month contract is higher than the price of the next month contract, the market would be described as being in backwardation.  When the price of the near month contract is lower than the price of the next month contract, the market would be described as being in contango. Although the prices of the near month contract and the price of the next month contract do tend to move up or down together, it can be seen that at times the near month prices are clearly higher than the price of the next month contract (backwardation), and other times they are below the price of the next month contract (contango).  In addition, investors can observe that heating oil prices, both near month and next month, often display a seasonal pattern in which the price of heating oil tends to rise in the winter months and decline in the summer months.  This mirrors the physical demand for heating oil, which typically peaks in the winter.


24











*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





An alternative way to view backwardation and contango data over time is to subtract the dollar price of the next month heating oil futures contract from the dollar price of the near month heating oil futures contract.  If the resulting number is a positive number, then the price of the near month contract is higher than the price of the next month and the market could be described as being in backwardation.  If the resulting number is a negative number, then the near month price is lower than the price of the next month and the market could be described as being in contango.  The chart below shows the results from subtracting the next month contract price from the price of the near month contract for the 10-year period between 2001 and 2010.  Investors will note that the near month heating oil futures contract spent time in both backwardation and contango.  Investors will further note that the markets display a very seasonal pattern that corresponds to the seasonal demand patterns for heating oil mentioned above.  That is, in many, but not all cases, the price of the near month is higher than the next month during the middle of the winter months as the price of heating oil for delivery in those winter months rises to meet peak demand.  At the same time, the price of the near month contract, when that month is just before the onset of fall, does not rise as far or as fast as a next month contract whose delivery falls closer to the start of the winter season.


25











*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





While the investment objective of USHO is not to have the market price of its units match, dollar for dollar, changes in the spot price of heating oil, contango and backwardation have impacted the total return on an investment in USHO units during the past year relative to a hypothetical direct investment in heating oil.  For example, an investment in USHO units made on December 31, 2010 and held to March 31, 2011 increased, based upon the changes in the NAV for USHO units on those days, by 21.36%, while the spot price of heating oil for immediate delivery during the same period increased by 22.42%.  By comparison, an investment in USHO units made on December 31, 2009 and held to March 31, 2010 increased, based upon the changes in the NAV for USHO units on those days, by 1.13%, while the spot price of heating oil for immediate delivery during the same period increased by 1.32%. (note: this comparison ignores the potential costs associated with physically owning and storing heating oil, which could be substantial).





Periods of contango or backwardation do not materially impact USHO’s investment objective of having the percentage changes in its per unit NAV track the percentage changes in the price of the Benchmark Futures Contract since the impact of backwardation and contango tend to equally impact the percentage changes in price of both USHO’s units and the Benchmark Futures Contract.  It is impossible to predict with any degree of certainty whether backwardation or contango will occur in the future.  It is likely that both conditions will occur during different periods.





Heating Oil Market.  During the three months ended March 31, 2011, the price of heating oil in the United States, as measured by changes in the price of the futures contract traded on the NYMEX that was closest to expiration, rose by approximately 22.42% from $2.5424 per gallon to $3.1125 per gallon.  Investors are cautioned that these represent prices for heating oil on a wholesale basis and should not be directly compared to retail prices.


26





Crude Oil Market. During the three months ended March 31, 2011, crude oil prices were impacted by several factors.  On the consumption side, demand increased inside and outside the United States as global economic growth, including emerging economies such as China and India, continued to improve during the first quarter of 2011.  On the supply side, efforts to reduce production by the Organization of the Petroleum Exporting Countries to more closely match global consumption were partially successful.  Production was also disrupted by political unrest in the Middle East, particularly Libya, which reduced global supply by approximately 1.8 million barrels per day.  Crude oil prices finished the first quarter of 2011 approximately 16.79% higher than at the beginning of the year, though investors looked forward to continued improvements in the global economy.  USCF believes, however, that should the global economic situation cease to improve, or decline, there is a meaningful possibility that crude oil prices could further retreat from their current levels.





USCF believes that over both the medium-term and the long-term, changes in the price of crude oil will exert the greatest influence on the price of refined petroleum products such as heating oil.  At the same time, there can be other factors that, particularly in the short term, cause the price of heating oil to rise (or fall), more (or less) than the price of crude oil.  For example, warmer weather during the high demand period of the winter season could cause American consumers to reduce their heating oil consumption.  Furthermore, heating oil prices are impacted by the availability of refining capacity.  As a result, it is possible that changes in heating oil prices may not match the changes in crude oil prices.





Heating Oil Price Movements in Comparison to Other Energy Commodities and Investment Categories.  USCF believes that investors frequently measure the degree to which prices or total returns of one investment or asset class move up or down in value in concert with another investment or asset class.  Statistically, such a measure is usually done by measuring the correlation of the price movements of the two different investments or asset classes over some period of time.  The correlation is scaled between 1 and -1, where 1 indicates that the two investment options move up or down in price or value together, known as “positive correlation,” and -1 indicates that they move in completely opposite directions, known as “negative correlation.”  A correlation of 0 would mean that the movements of the two are neither positively nor negatively correlated, known as “non-correlation.”  That is, the investment options sometimes move up and down together and other times move in opposite directions.





For the ten-year time period between March 31, 2001 and March 31, 2011, the chart below compares the monthly movements of heating oil prices versus the monthly movements of the prices of several other energy commodities, such as natural gas, crude oil and unleaded gasoline, as well as several major non-commodity investment asset classes, such as large cap U.S. equities, U.S. government bonds and global equities.  It can be seen that over this particular time period, the movement of heating oil on a monthly basis was not strongly correlated, positively or negatively, with the movements of large cap U.S. equities, U.S. government bonds or global equities.  However, movements in heating oil had a strong positive correlation to movements in crude oil and unleaded gasoline.  Finally, heating oil had a positive, but weak, correlation with natural gas.


27





Correlation Matrix

March 31, 2001-2011

Large

Cap U.S.

Equities

(S&P 500)


U.S. Gov't.

Bonds

(EFFAS

U.S. Gov’t.

Bond

Index)


Global

Equities

(FTSE

World

Index)


Crude

Oil


Unleaded

Gasoline


Natural

Gas


Heating

OilLarge Cap U.S. Equities (S&P 500)


1,000



-0.336



0.968



0.214



0.175



0.059



0.186U.S. Gov't. Bonds (EFFAS U.S. Gov’t. Bond Index)






1.000



-0.303



-0.168



-0.242



0.096



-0.126Global Equities (FTSE World Index)










1.000



0.308



0.235



0.109



0.270Crude Oil














1.000



0.756



0.399



0.846Unleaded Gasoline


















1.000



0.309



0.721Natural Gas






















1.000



0.484Heating Oil


























1.000Source: Bloomberg, NYMEX





PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS




The chart below covers a more recent, but much shorter, range of dates than the above chart.  Over the one-year period ended March 31, 2011, heating oil continued to have a strong positive correlation with crude oil and unleaded gasoline.  During this period, it also had no real correlation with the movements of natural gas compared to what it had displayed over the ten-year period ended March 31, 2011.  The correlation between heating oil and both large cap U.S. equities and global equities, which had been essentially non-correlated over the ten-year period ended March 31, 2011, displayed results that indicated that they had a positive correlation over this shorter time period particularly due to the recent recovery in the U.S. and global economies.  Finally, the results showed that heating oil and U.S. government bonds, which had essentially been non-correlated for the ten-year period ended March 31, 2011, were negatively correlated over this more recent time period.


28





Correlation Matrix
12months ended

March 31, 2011

Large

Cap

U.S.

Equities

(S&P

500)


U.S. Gov't. Bonds

(EFFAS U.S. Gov’t.

Bond Index)


Global

Equities

(FTSE

World

Index)


Crude

Oil


Unleaded

Gasoline


Natural

Gas


Heating

OilLarge Cap U.S. Equities (S&P 500)


1.000



-0.709



0.974



0.774



0.657



0.090



0.795U.S. Gov't. Bonds (EFFAS U.S. Gov’t. Bond Index)






1.000



-0.621



-0.689



-0.721



-0.275



-0.654Global Equities (FTSE World Index)










1.000



0.771



0.621



0.044



0.781Crude Oil














1.000



0.957



0.248



0.883Unleaded Gasoline


















1.000



0.217



0.829Natural Gas






















1.000



-0.063Heating Oil


























1.000Source: Bloomberg, NYMEX





PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS





Investors are cautioned that the historical price relationships between heating oil and various other energy commodities, as well as other investment asset classes, as measured by correlation may not be reliable predictors of future price movements and correlation results.  The results pictured above would have been different if a different range of dates had been selected.  USCF believes that heating oil has historically not demonstrated a strong correlation with equities or bonds over long periods of time.  However, USCF also believes that in the future it is possible that heating oil could have long-term correlation results that indicate prices of heating oil more closely track the movements of equities or bonds.  In addition, USCF believes that, when measured over time periods shorter than ten years, there will always be some periods where the correlation of heating oil to equities and bonds will be either more strongly positively correlated or more strongly negatively correlated than the long-term historical results suggest.





The correlations between heating oil, crude oil, natural gas and gasoline are relevant because USCF endeavors to invest USHO’s assets in Futures Contracts and Other Heating Oil-Related Investments so that daily changes in percentage terms in USHO’s NAV correlate as closely as possible with daily changes in percentage terms in the price of the Benchmark Futures Contract.  If certain other fuel-based commodity Futures Contracts do not closely correlate with the Benchmark Futures Contract, then their use could lead to greater tracking error.  As noted above, USCF also believes that the changes in percentage terms in the price of the Benchmark Futures Contract will closely correlate with changes in percentage terms in the spot price of heating oil.





Critical Accounting Policies





Preparation of the condensed financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate accounting rules and guidance, as well as the use of estimates.  USHO’s application of these policies involves judgments and actual results may differ from the estimates used.





USCF has evaluated the nature and types of estimates that it makes in preparing USHO’s condensed financial statements and related disclosures and has determined that the valuation of its investments, which are not traded on a United States or internationally recognized futures exchange (such as forward contracts and over-the-counter contracts) involves a critical accounting policy.  The values which are used by USHO for its Futures Contracts are provided by its commodity broker who uses market prices when available, while over-the-counter contracts are valued based on the present value of estimated future cash flows that would be received from or paid to a third party in settlement of these derivative contracts prior to their delivery date and valued on a daily basis.  In addition, USHO estimates interest and dividend income on a daily basis using prevailing rates earned on its cash and cash equivalents.  These estimates are adjusted to the actual amount received on a monthly basis and the difference, if any, is not considered material.


29





Liquidity and Capital Resources





USHO has not made, and does not anticipate making, use of borrowings or other lines of credit to meet its obligations.  USHO has met, and it is anticipated that USHO will continue to meet, its liquidity needs in the normal course of business from the proceeds of the sale of its investments, or from the Treasuries, cash and/or cash equivalents that it intends to hold at all times.  USHO’s liquidity needs include: redeeming units, providing margin deposits for its existing Futures Contracts or the purchase of additional Futures Contracts and posting collateral for its over-the-counter contracts, except as noted below, and payment of its expenses, summarized below under “Contractual Obligations.”





USHO currently generates cash primarily from: (i) the sale of baskets consisting of 100,000 units (“Creation Baskets”) and (ii) income earned on cash and/or cash equivalents.  USHO has allocated substantially all of its net assets to trading in Heating Oil Interests.  USHO invests in Heating Oil Interests to the fullest extent possible without being leveraged or unable to satisfy its current or potential margin or collateral obligations with respect to its investments in Futures Contracts and Other Heating Oil-Related Investments.  A significant portion of USHO’s NAV is held in cash and cash equivalents that are used as margin and as collateral for its trading in Heating Oil Interests.  The balance of the net assets is held in USHO’s account at its custodian bank.  Income received from USHO’s money market funds is paid to USHO.  During the three months ended March 31, 2011, USHO’s expenses exceeded the income USHO earned and the cash earned from the sale of Creation Baskets and the redemption of Redemption Baskets.  To the extent expenses exceed income, USHO’s NAV will be negatively impacted.





USHO’s investments in Heating Oil Interests may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons.  For example, most commodity exchanges limit the fluctuations in futures contracts prices during a single day by regulations referred to as “daily limits.”  During a single day, no trades may be executed at prices beyond the daily limit.  Once the price of a futures contract has increased or decreased by an amount equal to the daily limit, positions in the contracts can neither be taken nor liquidated unless the traders are willing to effect trades at or within the specified daily limit.  Such market conditions could prevent USHO from promptly liquidating its positions in Futures Contracts.  During the three months ended March 31, 2011, USHO was not forced to purchase or liquidate any of its positions while daily limits were in effect; however, USHO cannot predict whether such an event may occur in the future.





Prior to the initial offering of USHO, all payments with respect to USHO’s expenses were paid by USCF.  USHO does not have an obligation or intention to refund such payments by USCF.  USCF is under no obligation to pay USHO’s current or future expenses.  Since the initial offering of units, USHO has been responsible for expenses relating to: (i) management fees, (ii) brokerage fees and commissions, (iii) licensing fees for the use of intellectual property, (iv) ongoing registration expenses in connection with offers and sales of its units subsequent to the initial offering, (v) other expenses, including certain tax reporting costs, (vi) fees and expenses of the independent directors of USCF and (vii) other extraordinary expenses not in the ordinary course of business, while USCF has been responsible for expenses relating to the fees of USHO’s Marketing Agent, Administrator and Custodian and registration expenses relating to the initial offering of units.  If USCF and USHO are unsuccessful in raising sufficient funds to cover these respective expenses or in locating any other source of funding, USHO will terminate and investors may lose all or part of their investment.





Market Risk





Trading in Futures Contracts and Other Heating Oil-Related Investments, such as forwards, involves USHO entering into contractual commitments to purchase or sell heating oil at a specified date in the future.  The aggregate market value of the contracts will significantly exceed USHO’s future cash requirements since USHO intends to close out its open positions prior to settlement.  As a result, USHO is generally only subject to the risk of loss arising from the change in value of the contracts.  USHO considers the “fair value” of its derivative instruments to be the unrealized gain or loss on the contracts.  The market risk associated with USHO’s commitments to purchase heating oil is limited to the aggregate market value of the contracts held.  However, should USHO enter into a contractual commitment to sell heating oil, it would be required to make delivery of the heating oil at the contract price, repurchase the contract at prevailing prices or settle in cash.  Since there are no limits on the future price of heating oil, the market risk to USHO could be unlimited.


30





USHO’s exposure to market risk depends on a number of factors, including the markets for heating oil, the volatility of interest rates and foreign exchange rates, the liquidity of the Futures Contracts and Other Heating Oil-Related Investments markets and the relationships among the contracts held by USHO.  Drastic market occurrences could ultimately lead to the loss of all or substantially all of an investor’s capital.





Credit Risk





When USHO enters into Futures Contracts and Other Heating Oil-Related Investments, it is exposed to the credit risk that the counterparty will not be able to meet its obligations.  The counterparty for the Futures Contracts traded on the NYMEX and on most other futures exchanges is the clearinghouse associated with the particular exchange.  In general, in addition to margin required to be posted by the clearinghouse in connection with cleared trades, the clearinghouses are backed by their members who may be required to share in the financial burden resulting from the nonperformance of one of their members and, therefore, this additional member support should significantly reduce credit risk.  Some foreign exchanges are not backed by their clearinghouse members but may be backed by a consortium of banks or other financial institutions.  There can be no assurance that any counterparty, clearinghouse, or their members or their financial backers will satisfy their obligations to USHO in such circumstances.





USCF attempts to manage the credit risk of USHO by following various trading limitations and policies.  In particular, USHO generally posts margin and/or holds liquid assets that are approximately equal to the market value of its obligations to counterparties under the Futures Contracts and Other Heating Oil-Related Investments it holds.  USCF has implemented procedures that include, but are not limited to, executing and clearing trades only with creditworthy parties and/or requiring the posting of collateral or margin by such parties for the benefit of USHO to limit its credit exposure.  UBS Securities LLC, USHO’s commodity broker, or any other broker that may be retained by USHO in the future, when acting as USHO’s futures commission merchant in accepting orders to purchase or sell Futures Contracts on United States exchanges, is required by CFTC regulations to separately account for and segregate as belonging to USHO, all assets of USHO relating to domestic Futures Contracts trading.  These futures commission merchants are not allowed to commingle USHO’s assets with their other assets.  In addition, the CFTC requires commodity brokers to hold in a secure account USHO’s assets related to foreign Futures Contracts trading.





If, in the future, USHO purchases over-the-counter contracts, see “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this quarterly report on Form 10-Q for a discussion of over-the-counter contracts.





As of March 31, 2011, USHO had deposits in domestic and foreign financial institutions,including cash investments in money market funds, in the amount of $10,499,603.  This amount is subject to loss should these institutions cease operations.





Off Balance Sheet Financing





As of March 31, 2011, USHO has no loan guarantee, credit support or other off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions relating to certain risks that service providers undertake in performing services which are in the best interests of USHO.  While USHO’s exposure under these indemnification provisions cannot be estimated, they are not expected to have a material impact on USHO’s financial position.





Redemption Basket Obligation





In order to meet its investment objective and pay its contractual obligations described below, USHO requires liquidity to redeem units, which redemptions must be in blocks of 100,000 units called “Redemption Baskets”.  USHO has to date satisfied this obligation by paying from the cash or cash equivalents it holds or through the sale of its Treasuries in an amount proportionate to the number of units being redeemed.


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Contractual Obligations





USHO’s primary contractual obligations are with USCF.  In return for its services, USCF is entitled to a management fee calculated monthly as a fixed percentage of USHO’s NAV, currently 0.60% of NAV on its average daily net assets.





USCF agreed to pay the start-up costs associated with the formation of USHO, primarily its legal, accounting and other costs in connection with USCF’s registration with the CFTC as a CPO and the registration and listing of USHO and its units with the SEC, FINRA and the AMEX, respectively.  However, since USHO’s initial offering of units, offering costs incurred in connection with registering and listing additional units of USHO have been directly borne on an ongoing basis by USHO, and not by USCF.





USCF  pays the fees of USHO’s marketing agent, ALPS Distributors, Inc., and the fees of the custodian and transfer agent, Brown Brothers Harriman & Co. (“BBH&Co.”), as well as BBH&Co.’s fees for performing administrative services, including those in connection with the preparation of USHO’s condensed financial statements and its SEC and CFTC reports.  USCF and USHO have also entered into a licensing agreement with the NYMEX pursuant to which USHO and the affiliated funds managed by USCF, other than USBO and USCI, pay a licensing fee to the NYMEX.  USHO also pays the fees and expenses associated with its tax accounting and reporting requirements with the exception of certain initial implementation service fees and base service fees, which are borne by USCF.  USCF, though under no obligation to do so, agreed to pay certain costs for tax reporting and audit expenses normally borne by USHO to the extent that such expenses exceed 0.15% (15 basis points) of USHO’s NAV, on an annualized basis, through at least June 30, 2011.  USCF has no obligation to continue such payments into subsequent periods.





In addition to USCF’s management fee, USHO pays its brokerage fees (including fees to a futures commission merchant), over-the-counter dealer spreads, any licensing fees for the use of intellectual property, and, subsequent to the initial offering, registration and other fees paid to the SEC, FINRA, or other regulatory agencies in connection with the offer and sale of units, as well as legal, printing, accounting and other expenses associated therewith, and extraordinary expenses.  The latter are expenses not incurred in the ordinary course of USHO’s business, including expenses relating to the indemnification of any person against liabilities and obligations to the extent permitted by law and under the LP Agreement, the bringing or defending of actions in law or in equity or otherwise conducting litigation and incurring legal expenses and the settlement of claims and litigation.  Commission payments to a futures commission merchant are on a contract-by-contract, or round turn, basis.  USHO also pays a portion of the fees and expenses of the independent directors of USCF.  See Note 3 to the Notes to Condensed Financial Statements (Unaudited) in Item 1 of this quarterly report on Form 10-Q.





The parties cannot anticipate the amount of payments that will be required under these arrangements for future periods, as USHO’s NAVs and trading levels to meet its investment objective will not be known until a future date. These agreements are effective for a specific term agreed upon by the parties with an option to renew, or, in some cases, are in effect for the duration of USHO’s existence.  Either party may terminate these agreements earlier for certain reasons described in the agreements.





As of March 31, 2011, USHO’s portfolio consisted of 83 Heating Oil Futures HO Contracts traded on the NYMEX.  For a list of USHO’s current holdings, please see USHO’s website at www.unitedstatesheatingoilfund.com.




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Item 3.  Quantitative and Qualitative Disclosures About Market Risk.





Over-the-Counter Derivatives (Including Spreads and Straddles)





In the future, USHO may purchase over-the-counter contracts (“OTC Contracts”).  Unlike most exchange-traded Futures Contracts or exchange-traded options on such futures, each party to an OTC Contract bears the credit risk that the other party may not be able to perform its obligations under its contract.


Some heating oil-based derivatives transactions contain fairly generic terms and conditions and are available from a wide range of participants.  Other heating oil-based derivatives have highly customized terms and conditions and are not as widely available.  Many of these OTC Contracts are cash-settled forwards for the future delivery of heating oil- or petroleum-based fuels that have terms similar to the Futures Contracts.  Others take the form of “swaps” in which the two parties exchange cash flows based on pre-determined formulas tied to the spot price of heating oil, forward heating oil price or heating oil futures price.  In these swaps, a party pays a fixed price per unit and the other pays a variable price based on the average prince of futures contracts for a specified period or the price on a specific date, with payments typically made between the parties on a net basis.  For example, USHO may enter into OTC derivative contracts whose value will be tied to changes in the difference between the spot price of heating oil, the price of Futures Contracts traded on the NYMEX and the prices of other Futures Contracts in which USHO may invest.





To reduce the credit risk that arises in connection with such contracts, USHO will generally enter into an agreement with each counterparty based on the Master Agreement published by the International Swaps and Derivatives Association, Inc. that provides for the netting of USHO’s overall exposure to its counterparty.





USCF assesses or reviews, as appropriate, the creditworthiness of each potential or existing counterparty to an over-the-counter contract pursuant to guidelines approved by USCF’s board of directors (the “Board”).  Furthermore, USCF on behalf of USHO only enters into OTC Contracts with counterparties who are, or are affiliates of, (a) banks regulated by a United States federal bank regulator, (b) broker-dealers regulated by the SEC, (c) insurance companies domiciled in the United States, or (d) producers, users or traders of energy, whether or not regulated by the CFTC.  Any entity acting as a counterparty shall be regulated in either the United States or the United Kingdom unless otherwise approved by the Board after consultation with its legal counsel.  Existing counterparties are also reviewed periodically by USCF.  USHO will also require that the counterparty be highly rated and/or provide collateral or other credit support.  Even if collateral is used to reduce counterparty risk, sudden changes in the value of OTC transactions may leave a party open to financial risk due to a counterparty default since the collateral held may not cover a party’s exposure on the transaction in such situations.





The Dodd-Frank Act requires the CFTC and SEC to establish both “initial and variation margin requirements” on all swaps that are not cleared by a registered clearing organization (i.e., uncleared swaps).  In addition, the Dodd-Frank Act provides parties who post initial margin to a swap dealer or major swap participant with a statutory right to insist that such margin be held in a segregated account with an independent custodian.  At this time, the CFTC has proposed rules addressing margin requirements and the statutory right of certain market participants but has not implemented any rules on these issues.  On April 12, 2011, the Prudential Regulators and the CFTC issued proposed rules establishing minimum initial and variation margin collection requirements for Covered Swap Entities, which if adopted, would require Covered Swap Entities to collect minimum initial and variation margin amounts from swap counterparties.  The Prudential Regulators’ proposed rules would apply to those Covered Swap Entities that are regulated by the Prudential Regulators and the CFTC’s proposed rules would apply to Covered Swap Entities that are not regulated by the Prudential Regulators.





The amount of initial and variation margin that Covered Swap Entities would be required to collect under the proposed rules varies based on whether their counterparty to a particular swap is (1) a Covered Swap Entity, (2) a “high-risk” financial entity end-user, (3) a “low-risk” financial entity end-user (e.g.,financial entities subject to capital requirements imposed by bank or insurance regulators, that predominantly use swaps to hedge and that do not have significant swap exposure) or (4) a non-financial end-user.  With certain exceptions not applicable to USHO and the affiliated funds managed by USCF, Covered Swap Entities would not be required to post initial or variation margin to any of their counterparties except for other Covered Swap Entities.





Covered Swap Entities and all financial entity end-users would be required to post initial margin and variation margin when they enter into swaps with Covered Swap Entities.  Margin posted by “low-risk” financial entity end-users could be subject to thresholds under the proposed rules.  As commodity pools, USHO and the affiliated funds managed by USCF would be “high-risk” financial entity end-users and would therefore have to post margin without thresholds.





On April 27, 2011, the CFTC voted to propose rules for capital requirements for Covered Swap Entities that are not regulated by a Prudential Regulator.  Covered Swap Entities that are regulated by a Prudential Regulator will be subject to the capital requirements already imposed by such Prudential Regulator.  In general, higher levels of capital would be imposed on Covered Swap Entities that do not collect margin from their counterparties (or that collect margin subject to thresholds) in connection with their swaps, and could increase the costs of such swaps.  The rules proposed in April 2011 are currently open to the public for comment at the time of the filing of this quarterly report on Form 10-Q.


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In general, valuing OTC derivatives is less certain than valuing actively traded financial instruments such as exchange-traded futures contracts and securities or cleared swaps because the price and terms on which such OTC derivatives are entered into or can be terminated are individually negotiated, and those prices and terms may not reflect the best price or terms available from other sources.  In addition, while market makers and dealers generally quote indicative prices or terms for entering into or terminating OTC Contracts, they typically are not contractually obligated to do so, particularly if they are not a party to the transaction.  As a result, it may be difficult to obtain an independent value for an outstanding OTC derivatives transaction.





USHO may employ spreads or straddles in its trading to mitigate the differences in its investment portfolio and its goal of tracking the price of the Benchmark Futures Contract.  USHO would use a spread when it chooses to take simultaneous long and short positions in futures written on the same underlying asset, but with different delivery months.  The effect of holding such combined positions is to adjust the sensitivity of USHO to changes in the price relationship between futures contracts, which will expire sooner, and those that will expire later.  USHO would use such a spread if USCF felt that taking such long and short positions, when combined with the rest of its holdings, would more closely track the investment goals of USHO, or if USCF felt it would lead to an overall lower cost of trading to achieve a given level of economic exposure to movements in heating oil prices.  USHO would enter into a straddle when it chooses to take an option position consisting of a long (or short) position in both a call option and put option.  The economic effect of holding certain combinations of put options and call options can be very similar to that of owning the underlying futures contracts.  USHO would make use of such a straddle approach if, in the opinion of USCF, the resulting combination would more closely track the investment goals of USHO or if it would lead to an overall lower cost of trading to achieve a given level of economic exposure to movements in heating oil prices.





During the three months ended March 31, 2011, USHO did not employ any hedging methods such as those described above since all of its investments were made over an exchange.  Therefore, during such period, USHO was not exposed to counterparty risk.





USHO anticipates that the use of Other Heating Oil-Related Investments together with its investments in Futures Contracts will produce price and total return results that closely track the investment goals of USHO.  However, there can be no assurance of this.  OTC Contracts may result in higher transaction-related expenses than the brokerage commissions paid in connection with the purchase of Futures Contracts, which may impact USHO’s ability to successfully track the Benchmark Futures Contract.





Item 4.  Controls and Procedures.





Disclosure Controls and Procedures





USHO maintains disclosure controls and procedures that are designed to ensure that material information required to be disclosed in USHO’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.





The duly appointed officers of USCF, including its chief executive officer and chief financial officer, who perform functions equivalent to those of a principal executive officer and principal financial officer of USHO if USHO had any officers, have evaluated the effectiveness of USHO’s disclosure controls and procedures and have concluded that the disclosure controls and procedures of USHO have been effective as of the end of the period covered by this quarterly report on Form 10-Q.





Change in Internal Control Over Financial Reporting





There were no changes in USHO’s internal control over financial reporting during USHO’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, USHO’s internal control over financial reporting.


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Part II. OTHER INFORMATION





Item 1.  Legal Proceedings.





Not applicable.





Item 1A.  Risk Factors.





There have been no material changes to the risk factors previously disclosed in USHO’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed on March 30, 2011.





Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.





Not applicable.





Item 3.  Defaults Upon Senior Securities.





Not applicable.





Item 4.Removed and Reserved.





Item 5.  Other Information.





Monthly Account Statements





Pursuant to the requirement under Rule 4.22 under the Commodity Exchange Act, each month USHO publishes an account statement for its unitholders, which includes a Statement of Income (Loss) and a Statement of Changes in NAV.  The account statement is furnished to the SEC on a current report on Form 8-K pursuant to Section 13 or 15(d) of the Exchange Act and posted each month on USHO’s website at www.unitedstatesheatingoilfund.com.





Item 6.  Exhibits.




Listed below are the exhibits, which are filed as part of this quarterly report on Form 10-Q (according to the number assigned to them in Item 601 of Regulation S-K):




ExhibitNumber

Description of Document31.1(1)

Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2(1)

Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1(1)

Certification by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2(1)

Certification by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(1)

Filed herewith.








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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





United States Heating Oil Fund, LP (Registrant)By:United States Commodity Funds LLC, its general partnerBy:
/s/ Nicholas D. GerberNicholas D. GerberPresident and Chief Executive Officer(Principal executive officer)Date:  May 16, 2011By:
/s/ Howard MahHoward MahChief Financial Officer(Principal financial and accounting officer)Date:  May 16, 2011


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