The seal is supposed to go "squish".
When it is new, the seal protrudes further than necessary from the breach face so that when the breach is closed, the relatively soft seal is pushed hard into the receiver face to make a seal. That's when it gets squished, and excess material might "ooz" out to the sides.
The actual breach lock-up position is determined by the bottom of the breach block hitting the top of the lock-up detent wedge in the receiver, so as the breach is closed the seal will continue to squish until the lock-up is complete.
This design helps take care of manufacturing tolerances... if the breach and receiver faces are further apart, the seal squishes less, if they're closer, it squishes more. The squish might even be a little uneven, if the faces aren't perfectly parallel.
If the seal wasn't squished at all, then you'd have a REAL problem...
BTW - replacement seals are available from Crosman for $1.00 ea (part# C1K-008), with $4.00 for shipping (!). Since the shipping charge appears to be a flat fee, it might make sense to also order a couple of extra piston seals (C1K-002, around $3.00) and maybe even a mainspring or two (C1K-010, under $5.00).
They might come in handy if you wanna keep your Quest operable for many years. Once it's set up properly, it is a very pleasant rifle for the money...