It appears to me that in your picture of the holes your machine makes on paper that the holes are not round, but are more like hyphens positioned horizontally instead of vertically. If that is the case, the thread is going down on one side of the "slit" and coming up on the other. I agree that a smaller needle should improve things. It is possible also that there is a slight burr on the side of the needle you are using.
Best wishes to you on getting this problem taken care of.