You need to download the file first. DataSet.ReadXml supports just a file name, not url.
You could download the file with a WebClient (not tested):
byte[] data;
using (WebClient client = new WebClient()) {
data = client.DownloadData("https://onedrive.live.com/?cid=42FE4354E1EDA2AE&id=42FE4354E1EDA2AE!674");
}
File.WriteAllBytes(@"c:\myfile.xml", data);
EDIT: For downloading you need to use OneDrive API