Where does the O ring go on the fuel rail return line?

I'm trying to screw the fuel return line back onto the fuel rail on a 3.1 in a Malibu. Seems easy enough, problem is the first time I screwed it down it leaked! Since then I ordered the "official" GM O ring for $12 (yeah, $12 for an O ring) because the one in the assortment I bought at the auto parts store didn't work.

My question is where does it go? (See picture.) #1 or #2.

Before you answer, because the picture is deceiving, the slot (#1) is much wider than the O ring. YOu would think it would go there, I tried that and it leaked.

I'm thinking maybe it goes at #2 and the nut screws in and pushes on it. Which doesn't explain what the groove (#1) is for!